Co-op vs. Condo Comparison
One question I am often asked is “What type of apartment should I purchase, a co-op or a condo?” The answer is “It depends”. It depends on you, your future plans and real estate goals.
Questions you should consider are:
Will you reside in the apartment or is it an investment?
How long do you plan on staying there?
If you move out, do you plan on renting the apartment?
Do you plan on financing the purchase?
How much can you afford to finance?
How much do you have for a down payment?
Do you want to have input into how the building is managed?
Cooperative and condominium buildings each come with their own pros, cons and unique purchasing requirements. Understanding the differences between the two can help guide you to the right decision.
First, there are significantly more co-ops than condos in New York City. The greater supply of co-ops vs. condos is one of the reasons why co-ops are less expensive than condos. As of 2019, available apartment inventory in New York City is roughly 75% co-op and 25% condo. New condo construction in recent years has increased the number of available condo units. Likewise, their percentage of the available apartment inventory in New York City has and should continue to rise.
The key points below highlight differences between co-ops and condos.
In a co-op:
- A corporation owns the property.
- Tenant-shareholders own stock in the corporation, with a landlord-tenant relationship between the corporation and the shareholders.
- The corporation is governed by an elected board of directors. Transfer of stock requires board approval.
- The corporation usually has an underlying mortgage on the property.
- Maintenance charges include operating expenses, real estate taxes on the property and debt service on any underlying mortgage.
- Tenant-shareholders are able to deduct their share of mortgage interest and real estate taxes paid by the corporation.
In a condo:
- The association manages the property on behalf of all unit owners.
- Unit owners own the individual condo units, which are real property, along with a portion of the common elements.
- The association is governed by an elected board of managers or trustees, and transfer of units does not require board approval, although the board may have a right of first refusal.
- Condo associations cannot borrow as easily as co-ops (because the condo association does not own the property), and common charges cover the operating cost of the condominium.
- Unit owners pay their own real estate taxes on their unit.
The biggest difference comes in the form of ownership. Buying a condo unit means you are buying real property and hold a title to that property. Buying a co-op unit, on the other hand, means you are purchasing shares in a corporation that owns the co-op building. With those shares come the right to occupy that unit.
Other things to consider and the contrasting differences are outlined below.
Condos in New York City are typically 10-40% more expensive than comparable co-op apartments. There are fewer condos, meaning less supply, and condos are investor friendly which causes more demand.
Furthermore, buyer closing costs for condos are approximately 2.5% higher than for comparable co-op apartments. Buyer closing costs are higher for condos because of Title Insurance and the Mortgage Recording Tax.
Seller closing costs are usually higher for co-ops. Apartment sellers can expect to pay an additional 1% to 2% in closing costs when selling a co-op. This is in part due to the flip tax that is sometimes imposed by the co-op board. The purpose of this fee on sellers is to raise money for the building which benefits the shareholders.
Rules And Restrictions
Co-ops impose some of the strictest rules on residents ranging from limited sublet policies to noise regulation, pet policies and limitations on unit renovations and improvements. Typical co-op sublet policies are designed to encourage owner-occupancy and therefore the sublet policies can be quite restrictive. This does benefit the shareholders, however, as these policies are in place in order to make the co-op a stable investment.
The co-op board’s purpose is to protect the stability of the investment for all its shareholders. For that reason, there are typically strict financial requirements for purchasers in addition to a cumbersome board application process. An applicant may be rejected for any reason, with the exclusion of protected categories such as race, creed, color, national origin, sex, age, disability, sexual orientation, marital status, citizenship, occupation, or the existence of children.
Condos, on the other hand, typically have a less rigorous application process which only rarely results in a rejection.
Many co-ops may require buyers to provide a significantly higher down payment of 20-50% compared to a condo which can be as low as 10%. If you are an investor, making a higher down payment will reduce your leverage and likely lower the annualized return of your real estate investment over time.
Because of the more onerous board approval process with co-ops, it typically takes longer to close on a co-op apartment as compared to a condo. The average closing timeline for a financed co-op deal in New York City is two to three months from the time a fully executed contract is in place.
Monthly common charges for co-ops are often higher than similar monthly fees levied by condos. That’s because the co-op corporation must pay for the underlying building mortgage and property taxes in addition to the standard costs to operate and maintain the building.
When you combine a condo’s common charges with its real estate taxes, the gap between monthly charges does narrow but co-ops generally remain more expensive.
In conclusion, you should approach your decision by understanding your needs and using your knowledge of the differences in property types.
While this overview provides the basics, for a more detailed explanation of the legal and financial ramifications of ownership, please consult your attorney or financial advisor.
If you’re thinking of buying or would like more information, please feel free to reach out to me.
I look forward to hearing from you!