Last updated : Monday, March 23, 2009

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City Living: Co-ops vs. Condos

Lake in Central Park, New York City, NY, USA

With real estates experts and analysts saying now is a good time to buy (provided you can get approved), there are many options, and often at lower than market value. But when buying a place of your own, especially in urban areas, it's important to know exactly what you are purchasing. With 75 percent of the units in New York City co-ops, you want to be sure your investment will provide the right kind of return for your lifestyle. Which brings us to the question: co-op or condo?

What exactly do you own?
Essentially, when you buy a condo you buy property, with co-ops, you're buying shares of a larger property. "With a condo, you own specific property and are issued a deed," says Fredi Aleksi, a real estate agent of New York Residence. "With a co-op, you don't own the property, rather you own shares. You have a propriety lease for a specific property and you receive a stock certificate."

Consequently, your finances fall in line with your form of ownership. "Co-op fees are pooled, whereas condo fees are independent of each other, less connected," says Sylvia Shapiro, a real estate lawyer in Manhattan and author or The New York Co-op Bible. As the owner of a condo, you are responsible for your mortgage and property tax, which the government bills you directly, as well as monthly common charges for maintenance and repairs. You do not pay your own mortgage with a co-op, rather a co-op typically has an underlying mortgage for the entire building, a portion of which you pay. Likewise, property tax is a shared expense. Like condos, co-op residents pay monthly maintenance charges as well. "With condos, there is greater freedom," Shapiro says. "There is no underlying mortgage, finances aren't vetted and there is an independent property tax."

With this independence, however, comes some amount of risk. In a time of economic instability, it's imperative to understand the financial burden that comes with these two types of ownership. In co-ops, residents are protected from owing outstanding co-op fees to the bank if their neighbors have foreclosed. "With co-ops, there is something called a 'recognition agreement,' which basically means the banks have to pay outstanding maintenance fees in co-ops before they can collect anything in that specific foreclosure. The shortfall is paid by the bank up front." Conversely, with condos, the residents must come up with the shortfall (common charges) of the foreclosed condo. "Depending on how many foreclosures there are in a condo complex, this can amount to a lot of money," Shapiro warns.

A condo association vs. a co-op board of directors
Both condos and co-ops are governed by a volunteer board of directors. With co-ops, the residents elect the board. With condos, your stake in the board depends on how many units you own. While both boards oversee general building matters, like finances and maintenance, the authority of co-op boards is greater in scope. In addition to managing the finances of a building, co-op boards also have the final say in who can and cannot buy into the cooperation.

"A potential buyer has to apply to the co-op board, and by law the board can reject anyone without giving a reason, so long as it isn't on the grounds of discrimination," says New York real estate lawyer Nathan Erlich, of Nathan Erlich, P.C. Because of this, selling a unit in a co-op can often be a long and frustrating process. Aleksi adds that co-op boards often have stricter requirements to even be considered: you might need nearly perfect credit, substantial savings, a clear criminal record and reference letters, all of which they are allowed to ask. And sometimes rejections have nothing to do with how much money you have. Past rejectees of Manhattan co-ops include Madonna, Antonio Banderas and Richard Nixon.

Likewise, condo associations can also reject a potential buyer on the "right of first refusal". However, they are only allowed to do this once, and if they do, they must buy the unit under the same terms and conditions as the seller originally proposed. "As a result, there is less scrutiny on the part of condo associations over buyer finances because the condo associations don't have that kind of cash to buy from the seller," says Shapiro.

What should you look out for?
Before buying a co-op, be aware of the bylaws. "You should also look at the resolutions of the board for the last 12 months," says Erlich. "There could be something there that would make you not want to buy into that co-op!" Bylaws differ, but they can include restrictions on subleasing, pied-a-terre use, pets and construction. Shapiro emphasizes the importance of looking into a co-op's finances. "There is the tendency to fall in love with a place, but remember, it's not a house," she says. "You have to focus on the fact that it's part of a larger business entity and that there are complicated financial aspects." She advises looking into a co-op's financial history. Does it have adequate cash flow and reserves? Have additional charges been imposed on the owners? Also, make sure the co-op owns the land it sits upon, if it doesn't, steer clear. "A 20-year lease is like a ticking time bomb," Shapiro warns. Because a co-op board can ask to see anything, you should have everything from recent pay stubs to letters of reference available. With both co-ops and condos, ask to see the 'Arrear's Report,' which outlines how many units have been foreclosed. "This could be a precursor to potential foreclosures, where you can say, hmm, this building might have some problems," Shapiro says.

Maintenance and repairs
With both co-ops and condos you pay a monthly fee, which goes toward maintenance and repairs. This does not mean, however, that personal repairs are covered. "If it's a repair to do with part of the common system, like electrical or plumbing, the building is usually responsible,"says Shapiro. "If it's an appliance like a faucet in your apartment, you are generally responsible. But there are always gray areas, so make sure to read the bylaws for both co-ops and condos, to know what you are responsible for."

So which is right for you?
While co-ops often require a larger down payment than condos do, they typically cost less on the whole. "It might be good for people starting out who can't afford a down payment on a condo," says Erlich. "Or maybe for people who are older, who are looking to settle down in one place and know they'll be there for a while and won't want to sublease it." And while co-ops tend to have stricter guidelines, there might be a stronger sense of community.

If you buy a condo, you undoubtedly have greater freedom; you can sublease it, use it for the weekends and sell it to whomever you want. You are also the owner of property, which overtime, can be seen as an investment.

 

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