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Condo or Co-op? What is the Difference?

Do you hate the chores required to maintain your home? If you’re not a fan of mowing lawns, repainting porches or raking leaves, then a condominium or cooperative housing unit may be right for you. These are homes that are located in communities which were established in order to free homeowners from the burden of maintaining the exteriors of their dwellings. Most condo and cooperative dwellings share a common wall with their neighboring units in the same way as an apartment does, but some associations also offer housing units in the form of free-standing homes.

Whether you choose a condo or co-op, you will pay monthly fees to the association. The fees cover the cost of maintenance, and they may also include other costs as well. For example, both condo and co-op fees generally include the cost of fire insurance, except for your personal possessions, which you must insure separately.

Association fees can be steep, so be sure to take them into account when deciding whether you can afford the home. Another drawback to the fees is that they are inflexible. If you owned a single-family home, you could cut costs by deferring maintenance or doing some maintenance yourself. Maintenance fees on a condo or co-op cannot be put off if you have a budget crisis.

Choosing Between Condos and Co-ops:
In practical, day-to-day terms, living in a condo is very similar to living in a co-op, but there are a few subtle differences between the two.

The first factor to consider is geography. Most cooperative housing units are located in New York City and its surrounding neighborhoods. There are a few other co-ops scattered throughout the United States, especially in Chicago, Miami, Fort Lauderdale, West Palm Beach and Washington, DC.

Legal Matters:
Another most important distinction between condos and co-ops is the legal basis for your ownership. If you buy a condo, you will own real property. In other words, you will own the space between the walls of your unit, and you will own a share in any common areas. If you buy into a co-op, you are buying shares of a corporation. Owning shares of this corporation gives you the right to lease a space in the building that the corporation owns.

Exclusivity vs. Freedom:
One factor that might help you to choose between a condo or a co-op is the exclusivity that some cooperative housing associations exercise versus the relative freedom of living in a condominium.

By law, no association can turn down a prospective buyer on the basis of creed, race, sex or disability, but cooperative associations are free to discriminate based on other factors, and they often do. Some of the most exclusive co-ops require references from family, friends and business associates, as well as financial statements and personal interviews. Co-op boards have even been known to reject notorious celebrities on the basis that paparazzi might disrupt the daily lives of the current residents.

Although many condo associations claim that they have the power to restrict who can move into their communities, the reality is that condominium associations have little control over who is allowed to occupy their units. Therefore, it’s usually easier to sub-lease a condo, and it’s often easier to be approved by the condo board. (Most boards only require evidence that you can afford to buy the unit.) The disadvantage of this is that almost anyone could be your neighbor in a condo. There may also be a higher proportion of empty “investment” properties and vacation homes in a condo association.

Financial Considerations:
There are also a few financial considerations when choosing between a condo or a co-op. For one thing, it’s usually easier to obtain financing in order to buy a condo. Many lenders are leery of making loans to co-op members, because the legal basis for ownership is murkier than it is for condominiums. Fortunately, most cooperatives have a list of “approved lenders” who have made loans to other members in the past. These lenders usually offer a narrower range of mortgage options, with higher interest rates and larger down payments than a typical mortgage requires. By the same token, it is usually impossible to get a home equity line of credit on a co-op home.

On the other hand, property taxes on a co-op may be lower than they are on a condominium. This is because in a cooperative, there are no sales of real property. Instead, there is a transfer of shares in the corporation, which is not recorded like a real estate stale. This makes it difficult for tax assessors to know how much a comparable unit might sell for.

Speaking of property taxes, you are usually directly responsible for paying any taxes on your condominium. Cooperatives pay the property taxes out of the corporation’s budget and then pass the cost on to you in the monthly assessment. Cooperatives may also charge you for any underlying mortgage that the corporation may have used to buy or construct the building that contains your housing unit. A drawback to this is that if one person in a co-op defaults on these obligations and fails to pay the assessment, everyone else must cover the difference.

Another financial consideration with co-ops is how the property will be inherited. Because your heirs will be inheriting shares in a corporation (as opposed to real property), the inheritance will be considered a transfer of securities. Before buying any shares in a co-op, ask the board members how this will affect your heirs’ inheritance. If you plan to sell your shares before you pass away, find out whether there are limits on how much profit you can make from the sale. Some cooperative boards place a limit on the price you can ask for your shares in the corporation, while others have no limits and allow you to build up home equity just like a single-family home.

Co-ops do have a few benefits as compared to condos. For example, the cooperative association can often borrow money in order to make large improvements or repairs. This means that the costs of those expenses can be spread out over a longer period of time. Condo associations usually have to pay such costs out of pocket, which requires them to bill condo owners with hefty assessments.

The fact that the transfer of ownership in a cooperative is not recorded is also a plus. There are fewer taxes and fees associated with buying into a co-op, and because the sale is not made public, it allows the residents greater privacy.

Doing Your Homework:
Before you buy a condominium or purchase shares in a co-op, there are a few other questions you should ask about the community. Begin by learning more about the neighborhood. Interview a few long-time residents if possible, and find out whether they like the way that the association is managed.

Take the time to get to know a few of the board members as well. Ask them for a history of special assessments and fees, and find out how much money they have in reserve for emergencies. If possible, obtain financial statements from the past few years, and request a copy of the minutes of any meetings in the past two years. Be sure to enquire about special rules in the community, too. For example, is each resident entitled to a parking space? Are pets allowed? What are the noise ordinances?

Although it may seem that there are many differences between cooperatives and condominiums, the legal and financial details are often the least important factors when you are deciding whether to live in a community. Put a little bit of extra effort into learning more about the specific community that you’re applying to live in. After all, every neighborhood is unique, and you want to find a home that meets your specific needs.

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