What is the Difference between a Co-Op and a Condo?
In New York City, we have 3 major types of real estate. Each has different characteristics and closing costs. Find out which is right for you and what the difference is between owning a Co-Op and a Condo. Most properties either built or converted before 1990 are cooperatively owned (Co-Ops). Homeowners are called shareholders, because they purchase stock in a corporation, and that corporation owns the building. They are collectively partners in an entity that owns the building, and in turn grant themselves the privileges of ownership associated with owning real property in the form of a proprietary lease. There is a required purchase application process. This is sometimes found tedious and angst-ridden to most people.
The good news is that we do this with consistency and our team is designed to make this happen quickly and efficiently. We focus on what’s important, income and assets, and not on what’s superfluous. A coop has other characteristics as well. When you or your neighbors make permanent (non-cosmetic) changes, the building has guidelines and has an approval process. If you want to rent, the board may limit you over time, and so on. Some buildings prohibit you from financing more than a certain amount.
Roughly, 75 percent of the Manhattan housing inventory is comprised of Co-Ops. Unlike a Condominium, Co-Ops are are owned by a corporation. This means, when you buy an apartment that is in a Co-Op building, you are not actually buying real property (like you would in a Condo). You are in fact, buying shares of the corporation. These shares entitle you to a proprietary lease, which relates your relationship to the building close to that of an investor, rather than a Condo building, where you are the outright owner of your specific unit. Usually, the larger the apartment, the more shares you will have in the corporation you have bought into.
Now that you know what it is you are buying, we can now look into how a Co-Op differs from a Condo. First off, the approval process for Co-Op buildings is significantly more intensive than in Condominium buildings. Co-Op shareholders, unlike Condo owners who also pay a monthly maintenance fee to cover building expenses and upkeep like heat, hot water, insurance, staff salaries, real estate taxes and the mortgage debt of the building. Assessments on the building can also be incurred on the building and will (sometimes) drastically affect the value of the property you are considering.
The infamous Co-Op board sets their own standards in terms of the approval process as well as how the building is managed. Seeing that everyone owns shares in the building, the community as a whole is more concerned with who the building does or does not allow into the building. Co-Op boards also require an interview (or interviews) to meet you and ask any questions regarding the information you provided. They can approve or deny any applicant as they choose. The Co-Op buying (and selling) process is tricky one, where a real estate broker will certainly come in handy.
Condominium apartments differ from Co-Ops in that you will be owning real property. Think of purchasing a Condominium like purchasing a house in the suburbs, the purchaser is given an actual deed to the property purchased. Seeing that you own real property rather than shares in a building, each individual apartment will receive a separate tax bill from the city (rather than having your taxes be complied into monthly maintenance as seen in Co-Ops). Condo owners are required to pay monthly common charges similar to the maintenance charges in a Co-Op, however these charges tend to be lower than in Co-Ops because there is no underlying mortgage for a Condominium building.
The straightforward nature of buying a Condo plus the fact that in some cases you can finance up to 90 percent of the purchase price and sublet your apartment at will makes this form of ownership a top choice for flexibility, especially among investors, foreign buyers and parents purchasing for their children. That being said, there are significantly fewer Condos to come by. The majority of the New York City real estate market takes the form of a cooperative, while most new construction tends to be Condo. Many talk in high regards toward Condos, however, the community that is formed within a cooperative building is significantly closer. Condo owners tend to keep to themselves, seeing that they own their property, while co-op owners see their role as part of the whole, rather than as an individual. Either way both forms of ownership provide different costs and benefits to consumers. If you are looking for an apartment, I would recommend looking at both forms of property. Consult with your broker, move quickly (in this market you have to), and eventually find a house you can make your home.
Single/Multi Family Home
A house historically holds value greater than a Co-Op or a Condo. You can get an owner-occupied mortgage for any building with up to 4 units, and the other unit’s rent can offset your costs.
On the other hand, maintenance, taxes, and insurance costs can be much more expensive than apartments.
Older buildings (built pre-1980s) tend to be Co-Ops, while pretty much everything built from the 1980s onward is Condo. Beyond that distinction, your personal or financial circumstances, along with your lifestyle preferences and past experience, might guide you toward one or another.
Or, like many people, you may simply decide to look for the best apartment you can afford in a financially sound building, be it Co-Op or Condo.
The Fine Print
After you buy your apartment, you will largely find that its legal ownership structure has little impact on your use of it. That said, there are a number of quirks related to each that will be discussed on the following pages.
In a Co-Op, shareholders elect a volunteer Co-Op board that–except in some very small buildings that choose to save money by self-managing–works with a property management company to oversee the care and maintenance of the building.
The board also creates and enforces rules about everything from renovation inside units, to what’s allowed to transpire on the roof deck, to whether you can speak on your cell phone in the lobby, or whether (and what kind of) dogs will be allowed in the building. Unlike Condo boards, Co-Ops can even evict an extremely disruptive shareholder and force them to sell their apartment.
Overreaching, power-hungry Co-Op boards are the stuff of legend here, and some of the stories are true. However, at least as many Co-Op boards are made up of volunteers with full-time jobs and families who try to make the best of what is a demanding and time-consuming role if done right.
In a Condo, individual owners elect a Board of Directors that perform many of the same functions as a Co-Op board. Generally speaking, though, most Condo boards tend to be more hands-off when it comes to rulemaking.
That slightly more laissez-faire approach is partly due to philosophical underpinnings (more on that on the following pages) and partly because Condo boards legally wield less enforcement muscle. Yes, the board can fine owners for the expense related to any rule infraction and get a court-ordered injunction to stop it from happening again. But because a Condo owner actually owns his or her unit (versus shares in a Co-Op corporation), a Condo board can’t evict an owner from an apartment like a Co-Op board can.
Note: In both Co-Op and Condos, your voting power increases with the size of your apartment.
In a Co-Op, shareholders pay a monthly maintenance fee. Part of it goes toward the expense of operating the building. The other part is the amount of property taxes apportioned to each shareholder based on the number of shares assigned to their apartment. Particularly these days, when property taxes and fuel costs are rising sharply, maintenance fees are frequently adjusted upward each year (3%-7% annual increases are quite common).
In addition, Co-Op boards can require shareholders to pony up extra cash from time to time to boost the reserve fund or pay for a specific project. In a 40-unit building, for example, an assessment to replace an elevator might run $8,000-$15,000 per unit, depending on how many shares you own. Typically, shareholders can spread their payments out over a period of time such as 6 to 18 months.
In a CONDO, the monthly charges are referred to as common charges. Property taxes are not included; individual owners are billed directly by the government. This is an importance nuance to keep in mind when comparing carrying costs of Co-Ops to Condos, because at first glance, Condos may look cheaper on a monthly basis.
Like Co-Op boards, Condo boards also levy assessments when necessary.
Monthly charges in both Co-Ops and Condos tend to increase with the expansiveness of amenities and staff. However, larger buildings have economies of scale when it comes to staffing and operation that are often reflected in lower common charges.
We’ll go into more details about the somewhat infamous CO-OP approvals process later on, but for now, let’s start with the fact that a Co-Op board can turn down a buyer for any lawful reason. And because the reason need not be divulged, this means that in practice, unlawful reasons (race, religion, profession, sexual orientation, nationality, etc.) may also prompt a rejection. (Note: If you buy an apartment directly from the sponsor, you will not need board approval at all.)
For various reasons, most Condo buyers these days are subjected to nearly as much financial and personal scrutiny as Co-Op buyers. But rather than being turned down outright, pretty much the worst that can happen to a Condo buyer is that they wither away on the vine while a board engages in deliberate stalling tactics. Stalling is about all an unenthusiastic board can do, except for buying the place outright via the right of “first refusal”—which virtually never happens.
Most Co-Ops require buyers to put down 20-25% of the purchase price, about the same as what most lenders require these days. But the range can be vast, depending on the Co-Op—anywhere from 10% down (rare) to 50% or more at higher-end buildings. This is an important consideration between owning a Co-Op and Condo in NYC.
Co-Ops also expect you to have sufficient money left over (also known as ‘liquid asset requirements’). The required amount can range drastically, from a few month’s worth of maintenance payments to 1 to 3 times the purchase price of the apartment. Two years worth of mortgage and maintenance charges is about average.
In addition, each Co-Op will expect you to meet a debt-to-income ratio, usually around 25%-29%. That means your total monthly payments–mortgage and maintenance–cannot exceed the specified percentage of your gross income. An excellent credit score is also required.
Add them all up, and you will find that the average Co-Op’s financial standards are much higher than the average mortgage bank…a primary reason NYC Co-Ops withstood the last recession so well.
While in recent years, some Condos have started to require Co-Op-sized down payments, most typically don’t have any financing minimums. Bear in mind, though, that if you are getting a mortgage, banks these days often require 20%.
Many Co-Ops and Condos these days require buyers to put an additional one to two years of common charges in an escrow account as insurance against nonpayment. The odds of this happening to you increase along with the perceived ‘riskiness’ of your application, as measured in debt-to-income ratio, U.S. citizenship status, or a variety of other factors.
NYC Co-Ops are cheaper, on average than Condos. In the 1st quarter of 2016, for example, Condo buyers forked over an average of $2,061 per square foot in Manhattan, approximately 62% more than Co-Op buyers, who paid an average of $1,269 per square foot, according to the appraisal firm Miller Samuel. (The firm’s reliable quarterly market reports show pricing trends by size and type of apartment as well as by borough.) That said, those figures are skewed by a number of factors–including the fact that the average Condo is about 300 square feet larger than the average Co-Op (therefore commanding a higher per-square foot price)–shrinking the true price differential on apartments of similar location, size and amenities down to 10%.
Part of the reason Co-Ops tend to cost less is because they are typically older, lacking the bells and whistles of the tens of thousands of new Condos constructed in the past decade. Many newer Condos have also secured property tax abatements that enable developers to command higher sales prices than if buyers had to pay full tax bills right away.
Another reason Co-Ops are cheaper is that a board usually must approve buyers. That process involves a mountain of paperwork, a personal interview, the possibility of rejection, and the total (and totally one-sided) opening of your financial kimono to folks you will share the elevator with for years to come.
In addition to higher purchase prices, Condos also have substantially higher closing costs if you are taking out a mortgage: You will pay a mortgage recording tax of 1.8% of the mortgage amount for loans under $500k or 1.925% for loans above that. Also, your lender will require you to buy title insurance, which costs about .5% of the purchase price.
If you’re buying a new Condo (versus a resale), transfer taxes (1.825% of purchase price for properties over $500,000, and 1.425% for properties under $500,000) are also your responsibility, though these can often be a point of negotiation with a developer, who is more apt to cover fees like this than reduce the sales price, which can affect future sales.
Most CO-Ops have very strict policies about subletting, which does not make them an ideal investment opportunity and can present a serious challenge if your job suddenly relocates to London, for instance. The rules vary, but owners are usually allowed to sublet their apartment for no longer than 1 to 2 years in any 5-7 year period. The board also gets to approve your tenant and charge you a fee for subletting.
Condo sublet policies are far more liberal. While there may be rules against short-term sublets (say, less than 6 months), there is usually no outside limit nor do boards have the right to turn down a tenant unless they exercise that right of first refusal and lease your apartment themselves. But just like a Co-Op, the application fees, move-in fees, processing fees, etc., can range from a few hundred to a couple of thousand dollars extra that you or your potential tenant will have to pay. And you will be living in a building with a more transient population than a Co-Op.
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