You’ve finally built enough of a nest egg that buying a place is within reach. You’re not yet ready for a house in the suburbs, but you do want to live in your own apartment. Now, another decision waits. What should you look for? Co-op or Condo? And what is the difference? Actually, there are a number of significant differences between a co-op and a condo.
In the United States, there are about 5 million condos and co-ops in total, roughly 5% of housing units. They tend to be disproportionately located in major metros or nearby suburbs. In New York City, for example, there were about 400,000 co-ops and close to 100,000 condos in 2002. Almost all pre-1970 units were co-ops, so if your heart is set on a prewar apartment, you’ll have to look for a co-op. In some other markets, condos dominate. However, in most major metros (NYC, Chicago, LA, Miami) there are both co-ops and condos, so you’ll probably come across both in your search.
The most important difference is in the legal entity you buy. Cooperative housing, aka “co-ops” are buildings that house multiple dwelling units. A corporation owns the building. The individual co-op owners own shares in the corporation which entitle them to a Proprietary Lease to a specific apartment. The number of shares varies by apartment, based on its size, the floor, whether of not there is a terrace or balcony, and other special features it may have. You are an investor in the entire building rather than an “owner” of your actual apartment.
With a condominium, the owner actually owns his or her unit as a piece of real estate. A deed is given to the purchaser. The ownership in the condo is direct as opposed to being indirect, as it is in the co-op world.
Your monthly maintenance payment covers different items. In addition to the normal expenses of running a building (staff, upkeep, etc.,) a co-op usually has an underlying mortgage on the property that you pay as part of your maintenance fee. (This mortgage should not be confused with the mortgage you take to pay for the purchase price of your co-op.) The building’s property taxes are also paid as part of your maintenance fee.
In a condominium there is no underlying mortgage, and property taxes are paid directly by the condo’s owner.
A co-op buyer typically finds that the monthly maintenance fees are higher than in a similar condo unit in a similar location. Of course, once an underlying mortgage is paid off, monthly maintenance fees should be reduced, although this is often more theoretical than practical since most mortgages of large co-ops get refinanced. Also, keep in mind that offsetting the lower condo maintenance fee are the property taxes the condo owner must pay.
When comparing maintenance fees, keep in mind that a co-op owner also gets a tax deduction for those portions of the maintenance fees that are related to the interest on the building’s underlying mortgage and its property taxes. This is in addition to the mortgage interest deduction the owner gets on his own mortgage.
You enter into a different level of financial relationship with your neighbors. What that means is that co-op dwellers are more financially interdependent with their neighbors. For example, a co-op resident can pay his or her monthly maintenance fee on time, but the underlying mortgage for the entire co-op may still fall into default if others in the co-op do not pay their fees. This level of financial interdependence with one’s neighbors is not present in the condominium form of ownership, although the owners are still financially tied to each other through the condo association fees.
Common areas are treated differently. Let us say that your neighbor has a guest visiting who slips and falls in a hallway that is not even close to your apartment. Can you be held liable? Yes, you can. In the condominium form of ownership you have an undivided interest in common areas like halls, walkways, stairways, swimming pools, etc. You would need to have insurance for these common areas should an accident occur, or make sure that your condo association carries sufficient insurance. (Some states do have laws limiting the liability of individual condo owners for common areas, so check yours.)
Insurance for common areas in co-ops is generally included in the monthly maintenance fee and any lawsuits arising from accidents in common areas would generally be against the corporation that owns the building, not against an individual co-op shareholder.
Typically, you can finance a larger percentage of the purchase price in a condo, up to 90% in some areas. With a co-op, because there often is already a mortgage in the building, you may be able to finance 80%. However, many co-ops have much stricter rules that can require you to pay in cash much more than 20%, even up to the full purchase price.
The closing costs on the purchase of a condo are higher than on the purchase of a co-op, due to additional expenses, such as title insurance, mortgage taxes and property tax escrows. In New York City, for example, the closing costs on a $500,000 condo would be close to $15,000, compared to about $3,000 to close a purchase of a co-op. (Both condo and co-op buyers are also hit by a so-called mansion tax when the price exceeds $1 million.)
The board approval process is far more strenuous in a co-op. A co-op board can turn down any applicant without giving a reason. A condo association or board only has the right of first refusal, meaning that if they do not want the sale to go through they have to buy the condo for the association at the same price. As a practical matter, this is rarely done.
Note: In really hot condo markets, such as New York City right now, the boards have started to demand more extensive and comprehensive documentation packages from buyers, similar in scope to the co-op documentation.
Co-ops typically have strict limits on subletting, while condo owners can usually sublet with fewer restrictions. However, keep in mind that a condo building may have limit on how many units can be rented out at the same time, since banks may be hesitant to give mortgages in the building if too few units are owner-occupied.
A co-op often limits subletting to two years and only if the owner has a compelling reason for leaving, such as a work assignment.
Wayne J. Keeley, BA, JD, LLM contributed to this article.