Monday, January 4, 2010

Co-op vs. Condo


Differences between Cooperatives and Condominiums


Buyers looking to purchase an apartment in inevitably find themselves having to weigh the differences of ownership in a cooperative versus a condominium.

The vast majority of apartments available for purchase in New York  are either cooperatives or condominiums. The major difference is that purchasers of cooperative apartments or co-ops own shares in the entire building corporation. Condominium ownership is more like owning a single-family home in that purchasers own their physical unit.


Condo


In a condominium or "condo", the owner typically buys a deed giving them ownership of a particular unit in a building. In addition to the unit, the resident also owns a percentage of the common areas (the areas that all of the residents share, i.e. hallways, the roof, the parking lot, etc.) Condo owners pay a monthly fee in addition to their mortgage to help cover the cost of maintaining and repairing the common areas. When you own a condo, you own a piece of "real" property. You receive a deed, are assessed property taxes, and pay a mortgage just like someone who owns a house. Each condo owner receives his or her own personal mortgage and tax bill. As with any other piece of real estate, you are free to rent, sell, or sublet your unit to whomever you choose. The building is usually run by the condo association, which is made up of a group of elected condo owners. The board is mainly responsible for assessing condo fees, ensuring that the condo fees remain as low as possible, and settling disputes between unit owners.


Benefits of Owning a Condo


There are several benefits to owning a condo. The most obvious benefit is home ownership. When you buy a condo, you buy a piece of "real" property. This allows you to accrue equity in your home, just as if you owned a house. You can borrow against this equity or refinance if necessary. You are also able to sell, rent, or sublet your property to whomever you choose if you desire to do so. Another benefit of buying a condo is that the approval process is typically easier than it is for a house and even some co-ops. For this reason, condos are a good choice for young people, first time buyers and persons with less-than-perfect credit.


Disadvantages of Owning A Condo


While purchasing a condo can be a very sound investment, there are a few possible drawbacks that you should be aware of. As mentioned earlier, condos are considered real property. Therefore, you will be responsible for paying real estate taxes. And while the interest you pay on your mortgage is tax deductible, condo fees are not. Also keep in mind that your neighbors are free to rent their property to anyone they want. In addition to the possibly of having new neighbors that you may not get along with, too many renters in a condo can bring the property value down for everyone. Before moving into a condo, make sure that the number or renters is lower than the number of owners.


Co-op


A "co-op", short for Cooperative Housing Corporation, is a non-profit company whose sole purpose is to own and operate a residential building or complex. Buyers then purchase shares of stock in the building’s corporation. The larger the unit, the more shares they own. After purchasing the shares, the buyer is then given a proprietary lease to a particular unit. Since co-ops are the property of the corporation, the buyer does not actually own their apartment. Additionally, co-op shareholders will not receive mortgage or tax bills-these will be sent to the corporation directly. The corporation then splits all the bills among the residents via the monthly co-op fee, which helps cover mortgage payments, taxes, utilities, and maintenance.


Benefits of Owning A Co-op


Living in a co-op has several advantages. Many persons who live in co-ops are able to enjoy substantial tax breaks. Since they do not own any real estate, they are not responsible for paying real estate taxes (keep in mind however, that the corporation has to pay taxes on the property and a portion of your co-op fee goes to paying the building's taxes). Furthermore, you don't have to pay the transfer and recordation tax that is assessed whenever real estate is bought or sold. For persons concerned about protecting their privacy, co-op owners do not have to have public record of their property, since they do not own their apartment. This allows them to keep their address and purchase price confidential.


Disadvantages of owning a Co-op


While not actually being an owner of real estate can be of benefit to the co-op dweller, it can definitely have some disadvantages as well. For example, the co-op has final say over whom you can sell, rent, or sublet your property to. They even can impose restrictions on renovations and decor. Additionally, co-op associations are usually far more exclusive than condo associations, making the approval process more difficult. It should also be noted that since co-op fees cover such charges as taxes and utilities, they are considerably more expensive than condo fees.  Also, some co-op boards require you to put between 10% to 50% down payment, depending on each board. Some co-op boards require you to pay a Flip Tax when you sell the premises.  The Flip Tax can Range anywhere from 1% to 40% of your profit or selling price depending on the co-op board. In some cases they charge you a dollar value per share you own, or whichever is greater  again each board is different.


Pricing Differences Co-op vs. Condo


In general, in New York, cooperative apartments tend to have lower asking prices than comparable condominium apartments. But there are other factors to consider. Since co-op owners are shareholders in the entire building, the costs associated with the building such as the underlying building mortgage and the real estate taxes are the pro-rata responsibility of each of the shareholders. The number of shares allocated to each apartment is typically determined based on apartment size and location within the building.


Board Approval for Co-op Purchases


Each co-op building has a Board of Directors and its own set of requirements for prospective purchasers. Typically a would-be buyer must submit a full financial package listing all of their assets and liabilities and include copies of recent tax returns. The package is usually reviewed by the Board members or an admissions committee and then an interview is scheduled with the prospective purchaser. Boards can dictate the percentage of the purchase price that the buyer can finance. Boards can also require maintenance escrows or other forms of financial assurances. Condos generally do not require board approval.


Maintenance Fees in Co-ops and Condos


Since shareholders in a co-op own a stake in the underlying building, their maintenance fees sometimes referred to as common area charges, are generally higher than in a condo. However, since a co-op maintenance fee includes a portion of the underlying mortgage payment and local real estate taxes, a portion of the maintenance is tax deductible. Other costs covered by the maintenance charges in both co-ops and condos include staff salaries and electricity in the building common areas such as hallways and stairwells.




Other Considerations for Purchasing a Co-op or Condo


When considering the purchase of an apartment is a co-op or condo, it is important to look at the following items:




House Rules – In addition to containing standard language regarding noise policies and rules about floor coverings, the House Rules also set forth the building policies on pets, washer/dryers, restrictions related to apartment terraces and balconies and any flip tax requirements. Flip taxes are fees paid to the co-op or condo at the time of sale of the apartment usually by the seller but sometimes passed on to the buyer purchase.


•Maintenance History – Find out how often the maintenance has increased in the last several years and ask why. Also find out if the building has imposed any assessments on apartment owners. Assessments are usually used to cover major building expenses such as an unexpected repair or a renovation of common areas.


•Reserve Fund – The reserve fund is the amount of money a building has set aside for capital improvements. A prospective buyer should feel comfortable that the reserve fund is large enough to pay for foreseeable capital expenses such as building repairs and mandatory façade inspections required by New York City.


Narrowing Down Choices - Co-op vs. Condo


In the end, whether to buy a co-op or condo might as well be determined by personal preferences about the actual building and unit. The majority of  apartment buildings are cooperatives especially the pre-War buildings. New construction tends to be built as condominiums.


While condos and co-ops are both sound and economical alternatives to the traditional single family home, they do have major differences, the biggest difference between the two is how the property is legally owned. There are a number of pros and cons with both condo and co-op living-taking a good look at the key aspects of both will help you decide which option is the best for you.