Co ops and Condominiums are popular home purchases for first time buyers, and for those who are downsizing. They can be apartments or townhomes, in large high rises or small buildings. What is the difference between a co op and a condo?
The difference is the type of ownership. In a co op, you own shares of the building corporation, and the size or type of apartment you have is based on the number of shares you own. In a condominium, you own the apartment outright.
In both situations, you pay a monthly maintainance fee for the common upkeep of the building. Depending on how the building is physically structured, this may or may not include utilities. Both types of ownership also come with occupancy agreements. The occupancy agreement defines what modifications you can make, such as painting, kitchen upgrades, knocking out walls, etc. It also sets limits on when construction can be done, policies about pets, types of appliances that can be run in the building, and general rules.
Co ops are more common in the northeast, and in New York City they are a dominant form of ownership. Co ops are governed by a board elected by the shareholder residents. They have a set of rules about qualifications for purchase, and about occupancy. Co op purchases are not final until the board has approved them. Generally, they require anywhere from 20% to 50% downpayment, and they examine a prospective shareholder’s finances before a purchase can go through. Many boards have a rule that a prospective shareholder’s monthly income must be anywhere from two to four times the cost of the mortgage and maintenance, and some include other debt in that ratio as well. Co ops need to assure that shareholders can afford the monthly maintenance, because they must maintain cash reserves for major repairs and upgrades, pay the underlying mortgage on the building, and pay property taxes. Because maintenance includes property taxes and may also underlying mortgage on the building, a portion of the maintenance in a co op is usually tax deductible.
When I owned a co op in the early 1980s the corporation did not allow financing, all cash was required. My then husband and I obtained a loan from a relative combined with our savings. This worked in our favor as we purchased a large co op apartment very cheaply. However, the co op was difficult to re sell when we needed to move, until the board agreed to allow financing. When we sold after 5 years, we had about doubled our money, including interest, maintenance charges, and assessments. That gain was the down payment on our house in the suburbs.
Condos are easier to purchase, because the process is similar to buying a house. There is no board to review your finances. You pay your mortgage, your maintenance, and your own property taxes. Maintenance in condos is for the common areas, and is usually not tax deductible, as it does not cover an underlying mortgage on the building and your tax assessment is separate. Condos usually have a homeowners association which monitors building management and makes decisions about occupancy agreements, common area upkeep, and improvements.
A new type of condo living is becoming popular among families moving to new planned communities, where they purchase land and freestanding homes, but also pay homeowner association fees for upkeep of common areas, docks, parks, and clubhouses. In some of those communities, houses must be modified according to a uniform standard, in others the homeowner is free to do what they want with the house.
Co ops generally are available at lower selling prices than condos, because of the income requirements. The maintenance charges are often higher than comparable condos because of the inclusion of property tax and underlying mortgage. Co ops are great for building equity, and fabulous ways to enter the housing market. They are not for those who do not have solid down payments, or a verifiable income. Good co ops offer very nice apartments and well managed buildings at a price that does not mean taking on a huge mortgage for the middle class homeowner. If you need to finance most of your purchase with a mortgage and do not want to deal with a board when you purchase and when you resell, a condo is a better choice for you.