Co-ops vs. condos: Which is right for you?
Co-ops: They’re not just for grocery stores anymore. Most people hear the word “co-op” and immediately think of local markets that sell farm-fresh, organic produce or maybe neighborhood credit unions that cater to a select group of members. But co-ops also hold a prominent place in the real estate industry, and you may come across them on your hunt for a new home.
All too often, homebuyers confuse co-ops for condos, and vice versa. But these two property types are very different, with important ramifications ranging from your ownership status and day-to-day responsibilities to your mortgage rates and financing options.
Let’s take a closer look at the differences between condos and co-ops so you can make a more informed decision when deciding on a place to live.
What is a co-op?
A cooperative — or “co-op” — can refer to many different types of organizations depending on the context. Co-op ventures can range from credit unions to farms, but the term means something very specific in the real estate world.
A co-op is a type of multiunit housing owned and operated by a corporation. Each resident in the building serves as a member of the housing cooperative, possessing ownership interest in the property as a whole. But you don’t directly own your unit or private living space under this arrangement. The corporation owns every part of the home, including the interior, exterior, common spaces and, yes, even the unit you call home.
You won’t find co-op buildings in every housing market. In fact, only a select metro areas even allow for these types of dwellings. Some of the most notable parts of the country where co-ops are available include New York, Washington, D.C., San Francisco and Chicago.
How does a co-op work?
When you buy into a co-op building, you’re buying shares of ownership in the organization, not the property itself. You can either buy those shares in full using your own funds or take out a share loan from a lender to finance the purchase. A share loan is not the same as a mortgage; it’s a specific type of financial instrument often needed to finance the purchase of a share in a real-estate co-op.
That doesn’t make you an owner, per se — rather, a shareholder. How many shares are we talking about here? That depends on the housing cooperative. Organizations may weigh any number of factors when deciding how to allocate shares to members, including:
- Unit size (in square footage)
- Unit location (floor, corner unit, etc.)
- Amenities (renovated kitchens, spa-quality bathtubs, steam showers, etc.)
- Views (city skylines, waterfronts, parks, etc.)
All of those aspects impact your unit’s market value, and that’s the primary criteria that co-ops tend to use to distribute ownership shares. So, two units could have the same square footage, but if one has a better view of the skyline, then that unit’s resident will likely be given more shares.
Another wrinkle to think about is that the cooperative real estate organization will need to approve your membership application before you can sign a purchase contract. It’s usually a pretty elaborate affair, involving interviews with the board of directors, letters of reference and reviews of your personal finances that closely mirror the mortgage process.
Once your application has been approved, the cooperative will extend you a proprietary lease that gives you the right to occupy a unit in the building as a tenant. Given that tenant status, you might see a co-op referred to as a “co-op apartment.” That term can be a bit confusing, because when you hear the word “apartment,” you usually think “rent.” But you don’t pay rent on a co-op apartment — not in the traditional sense, anyway. Instead, you pay monthly assessments to cover the costs of maintaining the building, property taxes and a portion of the building’s mortgage payment.
In some cases, this financial arrangement can lower your housing costs compared with owning your own condo or house — even potentially undercutting traditional apartment rentals. As such, co-ops are sometimes viewed as a viable form of affordable housing, particularly in areas with a high cost of living like New York.
Types of co-op housing to know
Not all co-op real estate organizations follow the same structure. Often, the most prominent distinction among different types of co-op buildings revolve around the way in which equity is distributed.
- Market-rate equity co-ops: Equity in the property is distributed equally across each share. Co-op owners are then free to sell their shares — and, by extension, give up their proprietary lease — whenever they like. Share price will be determined by the current market rate: When the property market value goes up, the share price follows suit.
- Limited equity co-ops: The equity included in each share is split between the member and co-op organization. Housing cooperatives may choose to divide equity any way they like. For instance, 75% of the equity may go to the co-op, with only 25% going to the owner.
- Group equity co-ops: The group as a whole owns all equity in the property, rather than divide it up among each person or split between the organization and individual members. It can be tricky to benefit from any equity gains in these situations because your equity is shared by the community.
- Leasing co-ops: There are some scenarios where the co-op doesn’t actually own the building — it simply leases it from another organization. No one gains equity in this situation because the cooperative doesn’t have any ownership stake in the property.
Keep in mind that the home equity you own with a co-op usually only changes when the market value of the property goes up or down because your ownership stake will typically stay the same. The only other way to build equity under these circumstances would be to buy additional shares from other co-op owners.
What is a condo?
Compared with co-ops, condos are pretty straightforward:
A condo is a private residence you own within a larger multiunit building. Condos may be single-level units like a 2 bed/2 bath unit or multilevel areas like duplexes.
The size of the property can vary significantly, with some buildings containing just a handful of units, while others could have dozens. Each owner has shared access to the property, including amenities like parking structures, roof-top decks, gyms, swimming pools, tennis courts and areas for entertaining.
As a condo owner, your housing costs will include a monthly mortgage payment — principal, interest, homeowners insurance and property taxes — as well as homeowners association (HOA) fees. Those additional assessments cover the upkeep of the entire building, such as tuckpointing, landscaping, foundation maintenance, roof repairs and cleaning common areas.
Condos function pretty much the same as a single-family house when it comes to your mortgage and homeownership status. No one else in the condo association can claim a stake of ownership in your unit. The property title will be in your name, and your name alone (assuming there are no pre-existing clouds on the title). You’ll build equity with each payment you make and you can sell your unit whenever you choose.
Co-ops vs. condos: Comparing your options
Co-ops and condos share one important quality: communal living. Beyond the shared living space, though, these two types of properties couldn’t be more different. Let’s review the differences between a condo and co-op:
What do you own?
Own property shares rather than the unit itself
Own your private unit
How do you finance your purchase?
Buy shares from the cooperative or take out a share loan from a lender
Take out a mortgage from a lender
What are your loan options?
Share loans are typically fixed rate loans
Fixed rate loans, adjustable rate mortgages, government loans, jumbo loans
How is equity handled?
Equity may be gained through changes in market value or by purchasing other shares
Build equity through market value increases as well paying your loan principal
How do you pay property taxes?
Property taxes are paid as part of your monthly assessment
Property taxes are included in your monthly mortgage payment
What down payment options do you have?
Down payment options may be less flexible in certain areas
Down payment options are dictated by your lender and loan type
Do you need to receive board approval?
May require board approval to join co-op
Condo associations rarely possess approval rights
Co-ops: Pros & cons
You need to weigh the advantages and disadvantages of a co-op before making an investment in this type of property. Let’s review the pros and cons of co-op housing:
- May be more affordable upfront due to lower closing costs
- Viable alternative for affordable housing in areas with a high cost of living
- Strong sense of community
- Many housing costs are rolled into your monthly assessment
- May owe less tax when selling co-op shares
- Higher down payment requirements
- Rigorous application process involving full disclosure and stricter financial requirements
- Harder to sell — co-ops often charge sellers a flip tax (1-2% of sale price)
- Stricter policies on renting, subletting and resident behavior
- Higher monthly shareholder maintenance fee, which includes collective property tax
- Less flexibility to conduct home renovations without the co-op’s approval
- Accumulated equity may be split with the co-op or may not accumulate equity at all
- Selling your shares could be tricky if potential buyers are not able to meet co-op approval standards
- Interest rates on your share loan may exceed current mortgage rates
Condos: Pros & cons
There are plenty of pros and cons to consider when buying a condo as well, especially when it comes to affordability and housing costs:
- More flexible down payment requirements
- Lower monthly maintenance fees since property taxes are paid separately by residents
- May offer flexible subletting policies
- Rarely need to submit to a board approval process
- Higher loan-to-value ceiling
- More flexibility to upgrade your unit via renovations or improvements
- Easier to sell — boards rarely retain the rights to approve new owners
- Lower seller closing costs — roughly 1-2% less than co-ops due to no flip tax requirement
- Any accumulated equity belongs solely to the homeowner
- Can renovate and upgrade your unit as you see fit
- Mortgage rates are often lower than comparable share loan interest rates
- Higher buyer closing costs—roughly 2% more due to title insurance and mortgage recording tax
- Can be more expensive after factoring in closing costs, down payment and monthly housing costs
- Condo members may pay extra fees to retain the services of a property management company
- Lax subletting rules could lead to a lower rate of owner occupancy and a higher percentage of short-term renters
- HOA fees may represent a large percentage of your monthly housing costs, and could increase over time
- Special assessments could add one-off expenses
- Residents are financially responsible for repairs and maintenance of their units
- May offer a less communal environment
- May owe more taxes when selling a condo
Choosing between a co-op vs. condo
In many cases, condos present a more expensive proposition than co-op housing — but for good reason. With a condo, you’re a homeowner, not a shareholder. Your name will be on the title and the deed. No one else in your building can dictate what you do with your unit or ask you to share home equity with the condo association.
Still, there’s no denying that co-ops offer plenty to like as well — in the right circumstances, that is. In high-cost-of-living (HCOL) areas such as New York and Washington D.C., co-op housing keeps the dream of homeownership alive for many people who otherwise couldn’t afford to buy a home. Because co-ops are so laser-focused on keeping housing costs down, they often enable people to live in highly desirable neighborhoods and areas without needing to pay above market rate.
There’s also something to be said for the communal nature of co-op buildings. Neighbors coming together to pitch in and manage the property together — that could be very appealing to some prospective homebuyers.
Is that tradeoff worth potentially losing out on home equity? That depends on what you care about most. If you want to pay the lowest possible housing costs while still living in an HCOL area, a co-op could be the right fit. Likewise, people looking for a community to be a part of may find a lot to like with co-op housing.
On the other hand, if you’d rather pay a little more — and maybe sacrifice a little bit on location — to buy your own home, then a condo is probably the right move for you. Compared with co-ops, condos offer a very straightforward form of homeownership. You’ll make mortgage payments, build equity and, if you choose to sell your unit someday, you could make a healthy profit on the transaction.
Co-ops vs. condos: two seemingly similar forms of housing that are really quite different on a fundamental level. Both types of housing have their advantages and drawbacks, and it’s difficult to say that one is categorically better than the other. But, one will be better for you depending on your specific financial situation, what you’re looking for in a home and what your future goals look like.
That’s why it’s always important, no matter what type of property you’re considering, to take stock of what matters most to you in a new home. You can weed out options that won’t be able to meet your long-term needs and then find a forever home that will keep you happy for years to come.
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