Condo vs. Co-op - find out the difference
Thinking of buying? Read on for the facts.
People thinking about buying an apartment in New York usually know that there are two kinds available - condominiums and co-ops - and that the main difference is that the owner of a condominium owns real estate and the owner of a co-op owns shares in a corporation.
What many of them do not know is that there are other differences.
Most of the times for people buying first and maybe only thing that matters is the apartment itself. Space, location, layout, view. But what they also need to make themselves aware of are the differences between co-ops and condominiums so they know in advance exactly what they're getting into.
Form of ownership is not the only difference between co-ops and condominiums. As a buyers you will notice that the asking price for two exact same apartments one in a co-op and the other being a condominium is different. Condominiums are usually more expensive than co-ops.
One of the reasons for the disparity, is that co-op boards have more power to block sales than boards of managers in condominium.
Condominium boards usually have a "right of first refusal" - the right to buy an apartment at price agreed to by seller and the prospective buyer. On the other hand co-op boards have broad power to reject potential purchasers, subject to prohibitions against discrimination.
In that affect, some buyers who would rather not go through co-op board missions committee and might opt for a condo.
Another reason that some co-op apartments might be less expensive than equivalent condominium units, is that there is high financial obligation owning a co-op. This is the unit owner's proportionate payment on the underlying mortgage demanded on the obligation the debt owed by the co-op corporation that is secured by the building itself.
If you buy an apartment in a 10-unit co-op for $100,000, and there is $100,000 underlying mortgage on the building, the purchaser's lender would view the total purchase price as $110,000 because they would take in consideration that borrower's proportionate share of the
underlying mortgage. " But when you buy a condominium there is no underlying mortgage, so you are only paying price you are paying for the unit.
In condominiums no underlying mortgage on the building could also be a disadvantage.
If you have nothing to mortgage, it's harder to borrow money when you need it. For example if a major repair is to be done on the building and the condo has no money available, they are going to have to access the unit owner to raise the money, with assessments
The co-op on the other hand, has other options. For example, if there is already a mortgage on the building that mortgage can be refinanced for an amount that includes whatever additional money is necessary. While the share-holders will ultimately have to repay the money, they can do
so over an extended period of time - by paying higher maintenance charges, rather than having to pay a one-time assessments.
But while the ability to raise income from outside sources may be a good thing, some co-ops have to be careful not to raise too much outside income. Under current federal tax law,no more than 20% of a co-ops total income can come from "nonshare-holder" sources. If that limit is exceeded in any year, the co-op loses its status as a housing corporation for tax purposes and co-op share-holders lose their income tax deductions for property tax.
There is no such problem in condominiums, because condominium-unit owner owns real estate rather than shares in a housing corporation and pays his taxes directly.
Advantage of co-ops over condominiums is when dealing with unit owners who fail to make common charge or maintenance payments. If a shareholder stops making payments to the co-op and the lender, the co-op is first in line to get the money that is owed upon the sale of the delinquent unit owner's shares. With a condominium, the lender who holds the mortgage on a particular unit would generally be first in the line to receive money owed by defaulting borrower. Any common charges owed to the condominium association, would be paid only after the mortgage lender has been made whole.
Condominium boards have limited power over subletting of apartments, it is more likely that such buildings will have higher number of rental and transient tenants. If you are buying your apartment for investment and planing on renting it out you are better of with a condo. On the other hand, most co-ops have strict policies regarding sublets and such buildings usually have smaller number of renter in the building.
It is also much easier for a co-op board to deal with unit owners who violate the rules than it is for a condominium board of managers.
If a co-op shareholder violated the bylaws or house rules, the co-op board could terminate the proprietary lease and start eviction proceedings. And since the shareholder's right to occupy the apartment is dependent upon compliance with a proprietary lease, co-ops are generally successful in evicting truly troublesome tenant-shareholders.
In a condominium, however, the board of managers does not have the power to evict a unit owner who violates the house rules, because the condominium does not own the apartment. And while some people prefer condominiums for just that reason, there are others who prefer co-ops because the stability they provide.
Some people are attracted to condos because of their flexible rental policies. But if you're the kind of person looking for a building occupied by people as their principal residence, and you don't want to see a new face with a suitcase in the hall every week, then you would probably want to live in a co-op.