Only in New York, or as far as I know, there are such things as cooperatives (co-ops). Here, co-ops and condominiums (condos) seem to cause so much confusion, uncertainty, and loyalty depending on the person you talk to. Most people will vouch for condos and a small pocket of people are diehard co-op fans. But even still, there is much confusion about the two as I am still constantly asked during my open houses, what’s the difference?
First, lets go into the easiest of the two, as it is similar to owning a house, the condo.
What is a condo?
A condo is a type of real property where the homeowners own their individual unit space. Generally, it means that you own everything inside the walls of a unit. This unit can be an apartment, a townhouse, or even a single family house (yes, odd but true) and can include a private balcony or patio as part of the unit. All of the dwellings (or units) could part of a condominium building, complex, or community. The condo owners share ownership of common use areas which would include the hall ways, landscaping, and the entryway. For luxury type condominium complexes or complexes that have amenities, they would share ownership of a shared roof deck, pool, gym, or even possibly a parking lot or garage depending on if the spots are included in all of the units deeds. The list goes on in regards to shared amenities.
Condos are viewed by most as the ideal form of ownership, as it is actual real estate. Condos tend to appreciate in value faster than with a cooperative. They also are valued more per square footage, approximately 10% to 50% more, as they are in more demand than a cooperative.
Other things to note is that a deed would accompany your purchase, you would have to pay taxes on your unit, you can generally do any renovations to your unit, selling your property would be easier than with a co-operative, and renting restrictions are almost non-existent. There are a few condos that are almost as strict as a co-op, however, condos are generally more lax than a co-op. Also, in general, condo buildings are newer and newer buildings mean less wear and tear, and less wear and tear means less expensive repairs to pay for. Add into the mix of New York City’s generous tax abatements and a condo’s lower monthly expenses, it makes them very attractive.
So why even bother with a Co-op?
Sure, this sounds amazing! All of these perks, its worth more money, less hassle and stress than with a cooperative but cooperatives have perks too.
What is a co-op?
A co-op is a home that you don’t technically own and is much more like apartment living than a condo. When you own a co-op, it is not considered real property. You do not get a deed, you do not pay taxes for the unit, you do not own the unit that you reside in at all.
When you buy into a co-op, you become a shareholder in a corporation that owns the property. As a shareholder, you are entitled to exclusive use of a housing unit in the property. Instead of getting a deed, you get a propriety lease, which is a lease given by a corporation to a co-op share holder to reside in a specific unit. You also get certain number of shares in the co-op. Usually, the amount of shares are dictated by the unit size. Larger units are more valuable, so in turn, you get more shares. It can also be dictated on a private amenity, such as a balcony or patio which is only accessible by a specific unit.
But even with the fact that these units aren’t technically owned property, this isn’t much of an issue for many, especially since co-ops are, in most cases, cheaper than condos. The purchasing costs (i.e. price per square foot) tend to be anywhere from 10 to 50 percent lower than a condo. So why why do people hate on co-ops?
Really, it’s about the rules and subletting restrictions.
First, buying a co-op can be very difficult. With a condo, even if they have a board, they can’t just turn you down when you are trying to purchase a property. The board would have to purchase the unit, which is called the First Right of Refusal. First Right of Refusals happen when a party (such as a condo board) has right to be the first allowed to purchase a particular property if it’s offered for sale. This rarely happens. You have approximately a 1% chance of that happening to you when you are trying to purchase a condo but with a co-op, you will have to deal with a board.
Picture this: you have found your dream home and it’s in your budget. Your debt-to-income ratio is within respectable means. You are pre-approved and you know that this will be a breeze.
But it’s a co-op!
So, after your offer has been accepted by the sellers, inspections are complete and it all looks good, and your bank starts to work on getting an appraisal done, you now have to work on a board package.
Now let me tell you something, the board package is daunting! I am not going to tell you that it’s all rainbows and unicorns. They want information, tons of it. They also want details. “They want to know what?” “Why is it asking me this!?” “I need how many letters of recommendations?!!” “Why do they need my last two years of my tax return?!?” “Why does it need to be my entire tax return?!?!?”
After sharing your life story in documentation form, finally its done and your agent has gone through it and has submitted it to the board.
If all goes well, you will get to schedule an interview. If not, they will blatantly say no or they may ask you for more. They may ask for more reserve funds or for a co-purchaser even if you can afford it on your own. You can’t really guess with boards, you just have to wait and see. If you are working with a respectable agent, they will ensure that your application looks over qualified but even with a great agent helping you along the way, they still may say no.
If you do get a green light for an interview, you have to go through getting questioned like you are being interrogated and be able to keep your cool. Check out my other blog which dives a bit more on the subject on ways to help you pass your board interview.
All this is just dealing with purchasing the co-op.
If you do get a thumbs up from the board and you are able to purchase the co-op, you still have to deal with their rules and restrictions. Most co-ops have strict restrictions on subletting. Many co-ops are owner occupied only buildings, some will let you sublet after two years two years of living there, some will request that you only rent two years at a time with a break in between or maybe some other combo with breaks in between, and then you have the rare ones who will let you sublet as soon as you purchase.
If you are allowed to sublet, that’s great and all but the applicant will have to go through what you had to go through with an application to the board and an interview.
What about renovations? The board has to approve it. Want to change your door? The board has to approve it. Want to do anything really? The board has to approve it.
So what in the world is the good news?
Financials tend to be great with these buildings and they are mostly owner occupied (around 51% and 90%). This is a bonus when you are trying to purchase a co-op because with stronger financials and more owners residing there will make banks more comfortable with giving you a loan to purchase. On the flip side, selling it (if the buyers get approved by the board of course) will be easier with banks as well. With condos owners, they often have trouble selling their apartments when less than 50% of their building’s units are owner occupied (banks don’t like this and may not approve a mortgage for purchase). Seeing that investors love purchasing condos and renting them out, many condos have to deal with this issue. Another bonus to co-ops are that they also tend to discourage many people who may cause problems from living there as you have to go through tons of hoops already just to get in and they tend to be maintained even better than condos due to the hands on approach of the board.
These two types of homes have many differences and a few similarities however both can work for you if you are well prepared. Whatever your choice will be, I hope this helped clarify things! And if you know of anyone else who could benefit from reaching this article, please do share!