CONDO VS. CO-OPS: WHAT'S THE DIFFERENCE?

by Fernando Arce, licensed Real Estate Broker

If you are a first time home buyer in today's market and the prices of a one family or two family home of over $500,000 scares you, you may consider starting smaller with a coop or condo. So comes the question: What is the difference between a condo unit and a coop unit. Id like to begin with the most obvious difference - Price.

Price Difference

In today's current market, a condominium is a more expensive purchase then a coop. For instance, in Queens, New York a 1 bedroom 1 bathroom condo on average will sell for approximately $250,000 as opposed to a 1 bedroom 1 bathroom coop in the same area which will sell for $150,000. A Condo can be purchased with as little as 3.5% FHA loan as long as the building has been approved by HUD. Coops, however, require a 20% down payment.

Form of ownership

By purchasing either a coop or condo, you still enjoy the title of ownership along with some tax benefits and value appreciation. However, there are important distinctions and what you don’t know can cost you money and lots of aggravation.

The term "coop" and "cooperative" are short for "cooperative housing project." Cooperatives were in existence and common before the condominium scheme of ownership was fully developed in the United States. They originally evolved in the Northeast part of the states.

In a condo, each unit owner owns a specific apartment in a development in fee simple. In addition, the buyer owns an undivided interest in the common areas such as the exterior walls, roof, pool and other recreational areas. In a coop unit, the owners don't actually own any real estate. Rather, you own "shares" in a corporation. Now, as a shareholder, you get the right to lease space in the building. The cooperation owns the common areas. Therefore, a condo is considered to be real property and a coop is considered as intangible personal property.

Monthly fees

Another major difference is the monthly fees. In a condo unit it's called common charges and tends to be less expensive per month since the fee does not included real estate taxes and insurance. As an example, with the one bedroom condo mentioned above, the common charges would average $275.00 per month. Now, in a coop the charges are called maintenance fees and they included the taxes and insurance. For the same unit the fee would be $650.00 per month.

Property Taxes

Because condos are owned individually they appear in the property county clerks office as a single piece of property and therefore individual owners are taxed separately. In a coop property the entire building is owned by the corporation so it appears on the tax rolls as a single piece of property. The management pays the quarterly taxes and passes the cost to every shareholder on a per share basis.

Historically, property taxes run lower in a coop building than a condo development. The reason is simple; when a condo is sold an appraisal and higher sales price is recorded individually. This has will produce a higher assessed value and will result in a higher tax. Coops, as sales of stock, are not recorded at all and the only way a sale could be recorded is if the entire piece of property were sold which rarely happens.

Federal tax deductions

Home ownership continues to have its benefits when it comes to tax deductions. In a condo, each individual is able to deduct payments made for mortgage interest and property taxes if he or she resides in the unit as the primary owner. If the unit is subleased further deductions for such things as depreciation and maintenance if the condo is used as a rental property. The coop shareholder can only deduct his portion of the property taxes and interest on the underlying master mortgage.

Power of the board

This may be the biggest difference in our comparison. When looking to purchase a condo the buyer must make sure he or she can get a loan from a bank unless the purchase is all cash. There is no approval process. This is not the case in a coop sale. Buyers can potentially lose thousands of dollars if at the end of the day they do not get board approval.

The most common denial in a coop sale is the perceived inability for the buyer to make the payments on time. The board panel, which is made out of other unit owners in the building, have been know to deny applicants due to their job occupancy i.e. musician or celebrity. Cooperatives, of course, are bound by federal fair housing laws and cannot discriminate against buyers due to race, religion, sex, nationality, etc. But they can and do choose people based on financial resources and criminalbackground. Condos cannot exercise that kind of control.

House Rules

Lastly, there are the rules of the house. The rules of the house are probably the most important considerations most buyers will need to evaluate in determining if, in fact, a condo or coop fits the buyer's personal needs. One important factor is the sublease policy. Condo owners can rent out their unit to anyone they want at fair market rents. An application is still required but there is no board approval process. Coops have strict restrictions on subleasing and many will not allow subleasing the unit. Coops also have strict rules on pets, number of people occupying the unit and renovation to the apartment.

So, whether you are buying a condo or coop, make sure you have a licensed professional broker working with you and, of course, do your homework. An attorney will be needed to review the financial statements and by-laws of the building
to make sure your purchase is a safe investment.

Mr. Fernando Arce is a licensed real estate broker for over 17 years.
He can be reached by email at: fernando.arce@aol.com or by phone at: 646-306-4326.

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