Co-op vs. Condo – What the Heck is the Difference?

Many of you have heard of co-ops and condos, but do you really know the differences between them? If not, read on!

What is a co-op?

A cooperative or “co-op” is an apartment building which is owned by a corporation. When you purchase an apartment within a co-op building, you are actually purchasing shares of the corporation which entitle you, as a shareholder, to a “proprietary lease.”

Co-op shareholders contribute a monthly maintenance fee to cover the building’s expenses. The fee covers items such as heat, hot water, insurance, staff salaries, real estate taxes and the underlying mortgage of the building (if one exists). The interest on the building’s mortgage is tax deductible for co-op shareholders, and shareholders may also deduct their portion of the building’s real estate taxes.

What is a condo?

As opposed to a co-op, a condominium or “condo” apartment is real property. A buyer receives a deed just as though he or she were buying a house. An owner has ownership of his or her apartment and a share of the building along with the right to use the common areas of the building. There is a monthly common charge similar to maintenance in a co-op, but these charges don’t include your real estate taxes and are not tax deductible. Instead, each individual apartment in a condo receives its own tax bill. Common charges in condos tend to be lower than in co-ops because there is no underlying mortgage.

What is the purchase process for a co-op?

A co-op’s board of directors has the ability to determine how much of the purchase price may be financed and to establish minimum financial requirements for prospective buyers. Requirements can vary widely from building to building, but many co-ops throughout Manhattan and Brooklyn often require at least 20 to 25% down and a debt to income ratio of about 25% – meaning, your recurring monthly obligations cannot exceed more than 25% of your gross monthly income. Co-ops also have “post closing liquidity” requirements – you must have a certain amount of liquid assets left over after your down payment. A common co-op post closing liquidity requirement is an amount equivalent to 2 years of mortgage and maintenance. If you find a co-op apartment that you really like, you should inquire about their financial requirements before making an offer to determine whether or not you are a good candidate for board approval.

Finally, all prospective buyers must interview with the board of directors. Prior to the interview, buyers must prepare a detailed “board package” (a/k/a purchase application) which usually contains personal and professional letters of recommendation as well as a great deal of personal information concerning income and assets.

What is the purchase process for a condo?

Prospective buyers of a condo can often finance up to 90% of the purchase price of the apartment, but today’s lending environment makes that more difficult to obtain – 80% is more common as of late. Additionally, condos do not have post closing liquidity requirements like co-ops.

Although condos have a board of managers who make financial decisions about the building, condo board managers do not have the ability to reject a prospective buyer of an apartment. However, condos do still require the completion of a purchase application (which can look very similar to a co-op board package), and they can exercise a “right of first refusal” to purchase the apartment at the proposed purchase price (an action that is very rarely taken).

What are my options for renting out a co-op or condo?

Co-ops all have their own subletting rules, and some buildings are much more restrictive than others. Some buildings may require you to live in the apartment for 2 to 3 years prior to subletting, but you may then be able to rent the apartment for several years successively. Others may only permit subletting on a case by case basis while others may ban subletting completely.

Condos do not have restrictions on subletting. Absent any special clauses in the condo by-laws, an apartment can be sublet at will. However, prospective sellers in a condo should keep an eye on the number of rentals in a building – banks are very wary of lending to buildings with low owner occupancy levels.

So…given the straightforward nature of buying a condo, why would anyone ever want to purchase in a co-op?

Good question. The answer: available inventory and price. Co-ops are by far the most dominant type of property available in NYC, and these days, inventory for condos is incredibly scarce. There are also substantial differences in price between co-ops and condos. For example, according to Corcoran’s latest Market Snapshot, in July 2013 the average sale price in Manhattan for co-ops was $1152 per square foot in Manhattan versus $1746 for condos. Being willing to go through the additional requirements to purchase in a co-op can result in very big savings.

So there you have it – now you know some of the important differences between co-ops and condos, and hopefully this information will help you make an informed decision as to which one might be right for you. Still have questions? Feel free to email me!



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