Condo or Co-Op… which is the right choice?

With so many housing choices on the market, many individuals find themselves considering living in either a condo or a co-op; basically these two residences are the same, right? They physically look like apartments, so they must be comparable. On the surface that may be the fact; however, in reality they are different. This article explores the two types of residences; offering the distinction between the two as well as the financial implications. This way, you may decide in the end which is the best choice for you.

The Major Difference

Condo – When you purchase a condo, or condominium, you are buying in essence an apartment. In addition to the apartment, you pay monthly fees to share in the use of common amenities, building facilities, and over all maintenance of the building and grounds managed by an association. Buying a condo is much like purchasing a house as you hold a deed.

Co-Op – Ownership in a Co-op, or cooperative housing project, existed before condominium ownership. Instead of owning your apartment, you own the shares of the corporation that owns the building and the amount of shares you own dictates the size of your residence. Technically, you are not buying a real estate property; instead you have the right to occupy an apartment in accordance with the terms of a document called a “proprietary lease.” Co-ops are governed by a Board of Directors which tends to be more authoritative and restrictive than a condo association.

Board Approval / Requirements

Condo – When a potential buyer desires to purchase a condo unit, the existing homeowners have no say in who may or may not move in to the building. However, the condo association may enact a “right of first refusal” provision and require buyers to provide copies of the sales contracts, condo applications, and authorization for credit reports and even letters of reference.

Co-op – Potential buyers of a co-op must undergo a more complex application process for a board approval. Currently, co-ops “approve” buyers to confirm their financial ability to afford the home they hope to purchase inclusive of association fees, real estate taxes, and future capital improvement costs.

When seeking board approval, purchasers are generally required to provide an application, a detailed personal finance balance sheet, prior tax returns, and letters of personal and professional references — and all of this is prior to a scheduled interview with the board.

Financing

Condo – Condo associations simply do not involve themselves in the financing aspect; that is held between the buyer and the lender. Therefore, homebuyers may participate in a variety of financing options available.

Co-Op – Homebuyers purchasing into a co-op have restrictions and generally control the amount needed for down payment, thus the amount allowable for financing. Consequently, the current average reported rates are 25% down in cash with the remaining 75% to be financed. It is not unheard for a co-op board to require buyers to pay for their entire purchase in cash.

In today’s market, there are loan options available to both co-op and condo borrowers and are competitive with each other.

Maintenance Fees and Real Estate Taxes

Condo – Both condo owners and co-op shareholders pay maintenance fees and real estate taxes. How they go about payment differs. In a condo building, each homeowner receives a tax bill from the county.

Co-Op – Monthly fees are usually higher in a co-op as compared to condo associations because they include two additional expenses which condo owners pay but in a different manner. Shareholders do not receive a tax bill directly from the county as condo owners do. Rather, the county bills a single tax assessment to the corporation. Shareholders then pay a proportional share of the total bill based on the number of owned stock shares. Many co-op buildings include the taxes with the monthly assessment fees much like homeowners pay their taxes each month in an escrow account along with mortgage payments.

Capital Modification Projects

All buildings experience the need for capital improvements. Some projects may be simple upgrades; however, improvements depend on the age and circumstance of the building and vary in scope. There may be a need for tuck pointing of brick or mortar, updated elevators, a new roof, plumbing or electrical renovations, or even the advancement of environmental “green” improvements.

Condo – Funding is normally through “special assessments” which can be structured as a single payment or installments over months and perhaps years.

Co-op – With a co-op, the corporation can obtain financing using the building as collateral and extend the payments over a long time period. Homeowners then pay an additional monthly prorated share of the capital improvement plus their normal maintenance fees and “mortgage.” An added bonus for co-op owners is that any money paid as a mortgage is tax deductible just like any other home loan.

To Sum It Up…

In the end, either way you have a wonderful home, but how you attain it is distinctly different. You want to consider the pros and cons of each building as well as its amenities. However, the bottom line is the fact that you have to be comfortable with your finances and understand the monetary implications between a condo and a co-op.