On the surface, condos and co-ops look pretty similar; residents live in separate units within a single building and share common areas with their neighbors. Dig a little deeper, however, and you’ll see that they’re actually quite different. It’s a good idea to know the differences before making your choice, so we’ve created this handy two-part guide to help you choose which is best for you. Part one takes a look at cooperatives.
All about Co-ops
Cooperatives, or more commonly co-ops, function as a membership-based legal entity which owns a residential building. Rather than buying the apartment itself, residents buy shares of the corporation that owns the building, which entitles them to a unit. The larger the unit, the more shares the owner must buy.
The co-op is governed by a board, and as a shareholder, you’re entitled to a vote on how the condo is run. There are normally rules you’ll need to follow regarding anything from parking, to how you can paint your exterior walls, though these differ from board to board. When applying for financing for a co-op, you won’t take out a mortgage; instead, you’ll take out a share loan.
Buying into a co-op is a popular choice, and there are several advantages to be enjoyed, both financial and social.
- The main attraction is the lower costs often associated with co-ops. They’re not run for profit; instead, they operate on an at-cost basis. Additionally, in cities such as New York, there’s a far higher stock of co-ops than condos, further lowering the price.
- Lower closing costs are another bonus. Since you’re not actually buying real property, only shares, you’re not subject to fees such as title insurance or mortgage recording tax.
- One monthly bill incorporates everything from maintenance costs and utility bills, to property tax. At first, this can seem high, but when broken down, it’s typically around the same as you’d pay in a condo. Essentially, it’s popular for those who enjoy the simplicity of bundling all their bills into one.
- The co-op corporation is the owner of the property, and as such, they bear the maintenance and repair costs. So, if damage is done to your exterior wall, you will only have to pay your share of the bill.
- Despite not owning any real property, you are still entitled to the real estate tax deductions that are accessible to homeowners.
- You get to choose your neighbors. A vetting system is put in place to ensure that all new residents are financially secure, and are likely to fit in with the community. As a shareholder, you get to have your say. Many boards reject or limit the number of investors, opting primarily for long-term owner-occupants, reducing the risk of a string of bad neighbors.
Despite many positives, there are a number of things to be aware of, and sometimes a co-op just isn’t the right choice for your current circumstances.
- It can be difficult to buy and sell. Co-op boards are often much stricter than condo associations, especially when it comes to accepting new residents. Buyers must carry out a rigorous application process, which includes an interview, and submitting their financial records to the board. Even if they pass the high financial criteria, they could still be rejected without a given reason. This can also make it difficult when selling.
- For buyers, there are typically also strict rules regarding financing. For the most part, a down payment of anything from 20-50% is required, while some co-ops don’t accept loans at all.
- Foreign buyers cannot purchase co-ops, as they typically do not have the required history with US banks or credit. Investors are also typically denied, with many boards focusing on owner-occupants.
- Other strict rules can dictate whether you’re allowed to sublet your unit, buy the apartment as a parent for your kids, use it as a pied-à-terre, or use it for short-term holiday rentals. In most cases, none of these are possible.
- There’s a risk that if one member of the association defaults on their payments, it can affect all the other members. Whether it’s maintenance fees or a loan share payment, if a member cannot pay it, the other members might be required to cover the cost. However, this risk is somewhat mitigated by the arduous application process.
- In some co-ops, you may find you’re expected to dedicate a set amount of time for the cleaning and maintenance of the building. This is particularly common in smaller co-ops that have trouble finding staff.
- The way the monthly bill is structured may not work for you. For example, residents will pay their share of the total electricity bill for the building. So, if you own a 2% share, you’ll be required to pay 2%. This is not a good model if you don’t spend much time at the apartment, or don’t use much electricity.
Now you’ve got the low down on co-ops, stay tuned for part two, where we discuss the pros and cons of condos!