I’m watching a lot of HGTV in my boredom lately and occasionally will see buyer or seller referencing a Co-op as opposed to a Condo. While I have a vague understanding of the two concepts I’m unsure what, if any, implications go along with each from a livability, investment and/or liability standpoint.
So what’s the deal?
A condo is a piece of real-estate, generally consisting of one apartment in a building. The condo owner is responsible for paying fees to an association, which maintains the building itself and the grounds, any common facilities, and hires any necessary employees. The owners of the condos elect officers to run the association. Because a condo owner owns the apartment itself, they are generally free to make nonstructural renovations to their unit, and to rent them out to tenants.
A co-op has a different legal structure. Rather than purchasing a physical apartment, the co-op buyer purchases shares in a special non-profit corporation which owns the building (or buildings) as a whole. The shares entitle the owner to a perpetual lease to a particular apartment in the building.
Like a condo, the co-op owner must pay fees to the corporation for the upkeep of the building. The shareholders elect a board of directors to run the corporation, which maintains the building and hires staff. Because a co-op is not real-estate, the rights of a co-op owner are generally more limited than a condo owner. They may have to get permission to do any significant renovations, and potential subtenants may have to be approved by the board. Additionally, co-ops exercise broad discretion in to whom they decide to sell shares; the result is that some of the fancier properties had a reputation of discrimination. (This is less common today.) By contrast, federal law forbids discrimination against protected classes in real-estate transactions.
Does one have advantages from a lending standpoint? What about from a resale standpoint? Does the exclusivity of a co-op increase it’s cache and desirability?
Speaking as one who owns a co-op in New York State and a condo in Vermont, it seems easier to obtain mortgages on condos as opposed to co-ops, but that can be considered purely anecdotal.
Seems like it cuts both ways. The bank should have a bit less risk with a co-op since there’s less chance that a single unit could fall into disrepair or lose a lot of value. But then again a bank might have a more complicated issue should they need to foreclose and/or resell a co-op.
When I was looking (in the days of the real estate bubble), the available co-ops were cheaper than a similarly sized, similarly located condos. However, the co-ops weren’t accepting people who weren’t able to put 20% down on the property and didn’t have money in the bank beyond that. The questionable loans that you could get for a condo or a house at that time simply weren’t available for co-ops.
I believe that condo owners also own a share in common areas – but unlike a co-op, only they own their unit.
–Cliffy
For me, it was difficult to find very many lenders who wanted to do co-op loans. Every bank is set up to handle real-estate transactions, but co-ops require some special expertise that’s more akin to commercial banking. Co-ops are only common in New York City and the surrounding area, due to historical reasons involving New York real-estate law, so it seemed that only the big NYC-based banks were willing to do co-op loans, so I got my loan through one of them.
The co-op board also must approve all potential shareholders, so I had to give them my financial information and tax returns, and proof that I could put 20% down on the unit. They’re especially interested in the fiscal soundness of their shareholders because it’s a pain for the corporation if an owner becomes unable to pay their maintenance fees. The corporation can sue the shareholder and get the shares back in lieu of unpaid maintenance, and then kick them out, but that takes forever.
My co-op also makes one jump through rather ridiculous hoops if you want to sublet your apartment; you have to file a bunch of forms, have the potential tenant interviewed by the Board, etc. And subleases must be re-approved by the board every year. They really want to discourage owners from buying units purely as investment properties. OTOH condo associations generally have no power to prevent tenant-occupied units.
Some co-ops have guarantees where they promise to buy back the shares (at a specified price related to the original price and years since that sale). This can make it more attractive to a bank – if they foreclose, they don’t have to worry about it, just resell it to the co-op association at the specified price. And the co-op gains too – they retain a tighter control over who the unit is sold to.
Co-ops can (and do) raise capital by taking out a mortgage on the building. This is one reason for the difference in price between condos and co-ops. Some co-ops have rather large underlying mortgages while condos have none. When a condo needs to raise a large sum, they have to take out a regular loan, often at a higher rate and shorter term.
An important part of investigating a co-op is finding out how much the underlying mortgage is and how it is structured (these are commercial mortgages and are usually for 10 years or less and may or may not be interest only). If you have a large mortgage at a very low rate expiring next year and rates are high at that time, you might be looking at a rise in your maintenance fees.
A nice feature of the underlying building mortgage in a co-op is that, as a shareholder in the building, you get to deduct your proportional share of the interest paid on that loan from your income taxes. So every year, I get two 1098s: one from my bank and one from the co-op’s bank.
Right. In essence, you alone own the INTERIOR of your unit; every condo owner in your association jointly owns the exterior of all the units, and the common areas. Often, however, the individual owner may be responsible for some minimal maintenance of the exterior of their own unit–for example, keeping your own porch (of a townhouse condo, say) neatly cared for–but not much of the major/difficult stuff (cleaning gutters, powerwashing windows and siding, landscaping, etc.).