A Condo or Co-op? Which should I choose, and how do they compare?

Are you thinking about purchasing a condo or a co-op and have you wondered what the differences between the two are? It may surprise you to know that there is actually a great deal of difference between the two types of home ownership. For this discussion, I will begin with the basic defining characteristics of each type of ownership and then from there, move into a more detailed analysis of the pros of cons of each one.

Co-op, a basic definition:

A co-op is truly a completely different "ball of wax" in terms of home ownership. In fact, it is not home ownership at all, it is share ownership. With a co-op you don't actually own your unit; you own shares of a co-op corporation who actually holds the deed to the building, effectively making you a shareholder in the housing cooperative. As part of the cooperative, you are given the right to occupy a specific unit that is established through an occupancy agreement or proprietary lease. The cost of general maintenance is shared by all of the co-op shareholders as well as the amenities such as tennis courts or an on-site gymnasium. With a co-op there are also a set of rules and regulations that need to followed as well. Co-ops are generally located in urban areas (including Washington, D.C. ) and many of them began as apartments and later, sponsored by the tenants living there, converted to a co-op form of ownership.

Condominium ownership:

In contrast to a co-op form of ownership, when someone purchases a condominium that person actually owns the physical space within the condominium complex. Because each unit is individually owned, the unit can also be sold or transferred at the condominium owner's discretion. The common area maintenance is shared among all of the owners of the units which are located within the complex. These shared expenses are normally referred to as condominium fees. Condominium ownership is similar to a co-op style ownership in that in both cases, there are rules and regulations that any resident/owner must adhere to in order to be a part of the complex.

Condo vs. Co-op, a side by side comparison:

Probably, the driving force behind many people's decision to buy into a co-op arrangement is the lower cost to buy-in to the cooperative. In general, co-op units are less expensive then comparable condominium units. (although the monthly maintenance fees may be higher in some cases.) In some areas, such as New York City, certain co-ops are considered to be exclusive and therefore highly desirable. I think one of the best features of the co-op is that as a shareholder, you have a lot more control over who else may become a shareholder in your cooperative, whether the co-op allows units to be leased out or sublet and you have a say in the financial decisions that are made pertaining to the co-op.

All prospective purchasers must go through an approval process that sometimes can be quite rigorous. During this process the Board of Directors or other co-op governing body will review your finances, employment and even your personal background. This aspect of co-op ownership allows board members to hand-pick prospects to be a part of the cooperative thus gaining the reputation of being exclusive. It is important to bear in mind though that co-ops are not allowed to discriminate based on the protected classes listed in the Fair Housing Act which includes race, color, religion, sex, familial status, national origin or disability.

The co-op board can also set rules and regulations pertaining to the ability of shareholders to lease or sublet their units. Depending on your viewpoint, this could be considered a positive or a negative. Traditionally, homeowners have taken care of property better than their tenant counterparts; the thinking behind limiting leasing/subletting is that a homeowner will have a greater incentive to maintain the property in good condition and therefore keep the property values high.

Some residents, however, may find this to be a negative if they want to sublet their unit and cannot obtain approval by the other board members to do so. As a condo owner, you have the flexibility, in keeping with your condo association rules and regulations, to sell your unit at anytime to anyone without having to go through any type of board approval process.

Both condos and co-ops have monthly fees that are assessed in addition to any mortgage or share loan payments. In both instances these monthly fees (in a co-op, sometimes referred to as a monthly maintenance fee) are allocated to cover such expenses as management fees (if managed by outside company) maintenance costs (such as exterior siding or roof replacement) common area maintenance such as landscaping, etc. and reserve funds (funds set aside for larger project expenses, kind of like a savings account). Some monthly fees also include utility costs such as gas, water or electric as well as property taxes.
If the co-op or condo has amenities such as a pool or tot lot, those would also be covered with this monthly contribution. Where a co-op differs from a condo in terms of the monthly fee is that a co-op monthly payment will, in most cases, include a proportionate share of the "blanket mortgage or underlying mortgage".

The blanket/underlying mortgage is the mortgage loan on the entire cooperative building. In a condo situation, an individual mortgage is given in conjunction with a specific unit and each condo unit is treated as an entirely separate entity.

Another differentiating feature between the two types of homeownership is the way that real estate taxes are paid. As the member of a co-op, taxes are assessed and paid on the entire cooperative corporation. The monthly fee that you pay to the co-op will normally include your share of this expense. Although you don't pay the real estate taxes directly (they are not specifically in your name) The National Association of Housing Cooperatives website states that Federal Law allows you to deduct your share of the co-op tax payments, as well as your mortgage interest payments on your personal income tax return.

A condo owner has his/own tax bill that is either paid by him/her or included in their mortgage payments. As always, with any tax issues, please consult with your professional tax advisor for the most up-to-date information and to explore the tax benefits of any home/condo or co-op purchase.

Which is better for you, a condo or a co-op?

The answer will depend on you and your personal goals and needs. If your goal is to own real estate and be able to keep it as an investment property to rent out or re-sell at some point down the road, a co-op is probably not right for you. If, on the other hand, you are downsizing from a larger home and moving into a co-op where you plan to remain indefinitely, a co-op might be a good choice.

With either option, an extensive review of the co-ops or condo association's financial records, budget and all of the rules and regulations should be performed. In both cases, the laws in all local jurisdictions (Maryland, D.C. and Virginia) protect you, as a buyer with a right of rescission (within a specific time frame) upon review of these records.