"Splitters" can save you thousands on a new condo
When it comes to negotiating with a developer, the basic rule of thumb is to avoid asking for outright price reductions (which, because they're publicly recorded, effectively set a new lower price for every unit in that line) and focus on "off deed" concessions.
Many such concessions are either obvious or familiar: Payment of attorneys fees, prepayment of common charges for a defined period of time, upgrades to a unit, roof rights or even a rooftop cabana, license to non-deeded parking spaces, covering your contribution to the reserve fund, etc.
But we recently heard about "splitters," a rather obscure win-win concession that costs the developer almost nothing and saves you a small fortune--if you are taking out a mortgage--by reducing or eliminating the hefty mortgage recording tax.
The mortgage recording tax (which, for now, applies only when you finance a condo, not a co-op) equals 1.8% of the mortgage amount under $500k and 1.925% on mortgages above $500k. On a $500k mortgage, for example, that works out to $9,625.
Ugh.
Enter splitters (also known as a "Purchase CEMA"). Splitters can be negotiated where the seller has already paid a mortgage recording tax on their mortgage (in the developers' case, the construction loan) and the seller's lender is willing to assign a portion of that loan to your lender.
All or a portion of the seller's mortgage can be assigned. The buyer pays a mortgage recording tax only on the difference between the amount they need to borrow and the amount assigned by the seller, explains Mike Akerly, an attorney and real estate broker (and BrickUnderground's Rent Coach) who is helping to market five new condo developments in Brooklyn and who recently introduced us to the concept of splitters.
Technically speaking, says Akerly, the assigned mortgage is then consolidated with the buyer's and is extended and modified based on the terms agreed to by the buyer and their lender. The new, consolidated, extended, and modified mortgage results in a single lien against the apartment, with the buyer's lender as the only mortgagee.
"Say that you intend to borrow $1 million," says Akerly. "If the seller’s lender is able to assign your lender $500,000 from their prior mortgage, then you only have to pay the mortgage recording tax on the remaining $500,000. If the seller can assign a $1 million mortgage, then you owe no mortgage recording tax. Of course, the seller typically wants to share in the benefit you will receive, but that’s all part of the negotiation."
(Another negotiating tip from Akerly: The seller additionally stands to save several thousand dollars in something called "a continuing lien deduction" on state and local transfer taxes. Ask your attorney for more info and be sure to figure this amount into your negotiation.)
Your lender must also agree to the splitting arrangement--most likely to happen when you use the same lender as the seller--and your closing attorney will bill you for some extra time working all this out.
The main reason more buyers aren't doing it, says Akerly, is "almost nobody knows to ask for it and it can be difficult to get all the parties to agree to cooperate to get it done."
Another reason is that many in-house agents representing new construction are apparently unfamiliar with the somewhat sophisticated concession.
"Ask to speak to the project manager," advises Akerly. "The sponsor may have told the project manager that when someone asks for a price reduction of $20,000, offer them splitters that save $20,000 in mortgage recording tax instead."
Though splitters could also work in a typical resale transaction, they're generally only found in new construction
"You just won’t generally see it in resale because the seller won’t be equipped to offer it and their bank probably won’t care to participate," says Akerly. "A developer and a lender have a much closer relationship because of the dollar amount of their transactions together and repeat business."
Related posts:
Ask an Expert: How do I check on a developer's track record?
The real (scary) numbers behind those tax abatements
BrickUnderground's New Construction Survival Kit
