What Is A Co-Op?
A housing co-op is a type of residence in which owners hold shares in a corporation that owns a building rather than owning the real estate itself. The building is typically managed in the same way a corporation might be managed. A board, consisting of shareholders, a CEO and managers or directors, is in charge of specific projects and operations the building may require.
A co-op can be a good option if you want more stability compared with an apartment and want to be involved in how your property is managed.
Here’s a rundown of the key distinctions between condos and co-ops.
Ownership
The main difference between a condo and a co-op lies in how ownership of each property works. A condo is an owned private residence located inside a shared building. While a co-op is also contained within a larger structure, its residents don’t actually own their living spaces but rather have proprietary leases, giving them the right to live in the property until they sell or transfer their shares.
When you buy a condo, you receive a deed to the new home like you would if you bought a single-family home. However, you only own the interior of your property. The condo association owns the exterior of your condo and also handles most exterior maintenance and repairs.
If you buy into a co-op, the property belongs to everyone who lives within it. If you own more shares, you own a larger percentage of the corporation and may be entitled to a larger living space within the co-op. Every shareholder splits maintenance fees, taxes, repair costs and property management fees.
Governance
As we mentioned, condos are typically run by condo associations, which function similarly to homeowners associations (HOAs). These associations handle maintenance issues and create bylaws for the community to follow concerning such details as the types of pets condo owners can have, quiet hours and use of common areas. It’s important to know the rules of the condo association before you move in.
Co-ops operate in a more businesslike manner. As with a publicly traded company, every co-op shareholder gets to vote on issues that affect tenants. Co-ops usually elect a board of members to collect fees and maintain items like common spaces. The co-op might also vote to hire a property management company to handle the day-to-day workings of the building.
Pricing And Market Value
Determining the fair market value of a condo is similar to determining the market value of a single-family home. The condition of your condo and the values of other residences nearby can influence its fair market value. An appraiser can give you an estimate of how much your condo is worth.
As for co-ops, two main types of valuations are considered: market rate and limited equity. The process differs between these types.
In a market rate co-op, you can determine your co-op’s value in essentially the same way you would for a condo or single-family home. An appraiser takes current market conditions into account and determines how much your shares of the co-op are worth. You can sell your co-op shares for whatever price the market will bear.
In a limited equity co-op, you’re limited in how much you can gain in equity from your shares. In some instances, you may earn $0 in equity due to co-op rules that limit how much you can sell your shares for. These types of co-op rules are usually put in place to provide affordable housing below market rates. Make sure you and other shareholders understand the equity rules before you try to sell a co-op.
Financing
While both property types may allow for financing, there are some key differences to note.
Condos are typically easier to finance because the owner will have physical property as collateral. This also means that as a prospective buyer, you can make a lower down payment, as low as 3%, depending on your financing.
In contrast, a co-op owner is buying shares of the corporation that owns the property. As such, getting approved for a loan to purchase a co-op can be more difficult or outright impossible if the co-op’s board forbids financing.
Lenders that do offer co-op loans only offer financing to market rate co-ops in specific markets, because this structure allows them to ensure the home buyer gains equity as they make payments, protecting the investment. Some lenders may even require a larger than normal down payment, and they will want to know about the structure of the co-op and its board of directors.
Closing Costs And Taxes
When you purchase any type of property, certain closing costs and taxes come along with it.
For a condo, these will be slightly different from what you’ll encounter when buying a co-op. For example, if you’re closing on a condominium, you should expect to pay property taxes, title insurance, appraisal fees and inspection fees depending on where you’re buying the property.
When you buy a co-op, on the other hand, you won’t have to pay for mortgage insurance, and property taxes are rolled into your monthly co-op administration fees. Other fees like REALTOR® commission and transfer taxes, however, remain your responsibility.
Renting And Selling
Condos and co-ops rely heavily on rules and regulations of who can occupy a property, though those of condos are typically much more relaxed.
If you live in a condo, you’ll most likely have the option to rent out or sublet your property to tenants. You’ll be responsible for conducting background checks and ensuring your renters follow the rules in your community’s bylaws. You can also sell your condo at any time, provided there are no restrictions in your contract or community guidelines.
Co-op apartments often forbid renting and can be difficult to sell because each sale must be approved by the board of directors. Even after you find a buyer accepted by the co-op, you’ll likely have to pay a transfer fee when you sell your shares.
Amenities
Amenities are a big draw for both condos and co-ops. These can include gyms, green space, laundry facilities and pools, all managed by the building owners.
Co-ops can offer similar amenities, but the co-op board is responsible for management and upkeep. Since board members are also residents, this can create greater interest in maintaining and improving the quality of life within the building. Co-ops also empower boards to make decisions that reflect the wishes of the majority of shareholders. This may help some initiatives get pushed through that may have otherwise resulted in disagreements or discord between owners.
Rules And Regulations
Both condos and co-ops have rules. But how strict the rules are, who writes the rules and how easy it is to change the rules may differ significantly between the two property types.
Condos offer more freedom, in a sense. While there may be a basic outline provided when a building is completed, owners come together and determine what rules to add or take away. In some cases, not everyone will agree on a rule change, and owners will have to rely more on diplomacy to get things done.
In co-ops, the board is responsible for managing and enforcing the rules of the building. Though the board makes decisions based on shareholders’ wishes, there may be more bureaucracy involved in pushing changes through the pipeline.
Recurring Fees
In a condo, you’ll be responsible for paying monthly association dues, which go toward maintaining the common areas and amenities and paying for any needed repairs or renovations. A portion of the fees may also be allocated to a reserve fund, or savings account, for larger expenditures, like fixing a broken elevator or draining a flooded parking lot. In some cases, you may also be responsible for property taxes on your unit.
Co-op fees also cover many of these expenses, though they include property taxes, utilities and insurance. One of the advantages of living in a co-op, however, is that the corporation is ultimately responsible for any major issues.
Application Process
You usually don’t need to participate in any interview before buying a condo. Even if your condo association sets strict rules on how you can use your property, it doesn’t control who moves into any unit in the association.
Buying a co-op, on the other hand, typically requires an application process. Prospective buyers will have to be approved by board members before they’re able to buy shares in the co-op. The board approval process can include personal interviews and a review of your financial documentation, like a mortgage lender would.
As with a single-family home purchase, getting preapproved is a good first step when buying a condo or a co-op.
Availability
Condos are widely located in most major cities, suburban areas and some small towns. Co-ops are a little less widely available, mostly found in larger metropolitan areas like New York City, Seattle or Philadelphia.
Home buyers looking to live in less populated areas would have more luck finding condos as housing options.
