New York City is unique in that so much of the housing stock here is in the form of co-operative apartments, or co-ops. You may one day have a buyer client who is unfamiliar with co-ops, and needs to be walked through the advantages and disadvantages of a co-op versus a condo. Or you may find yourself going on a listing pitch for an apartment and need to know what questions to ask the seller, depending on whether he is selling a co-op or a condo. Either way, here’s our quick cheat sheet on the different types of ownership.
What is a condo?
A condominium is real property — a form of ownership, in which the owner has a separate unit, but the owners of all the units have joint ownership of their common areas. Those areas could include the building’s lobby, elevators, garden, roof terrace, residents’ lounge, health club and other amenities. A condominium association (usually with a name like “Main Street Condominium Association”) runs the building, often by hiring a professional property manager as its managing agent.
What is a co-op?
A co-op, by contrast, is a building or buildings owned by a corporation (usually with a name like “1111 West 100th Street Owners Corp.”) and owners are actually stockholders in the corporation rather than unit owners. Along with your shares of stock in a co-op, you would get a special type of lease, known as a proprietary lease, that will allow you to reside in your unit as a long-term tenant. Share allocation is determined when the building converts to a co-op, so it can vary by building. Generally, a larger apartment in a building will be allocated more shares than a smaller one and a higher-floor apartment will be allocated more shares than a lower-floor one.
Application differences for condos and co-ops
Purchasing in a co-op often requires the completion of a purchase application, which can be quite lengthy and detailed. A typical co-op purchase application might ask for a letter verifying the buyer’s employment, several letters of character and/or financial reference, multiple years of the buyer’s tax returns, and multiple monthly statements showing the buyer’s checking and retirement accounts. Some co-ops want you to show substantial assets, known as “reserves” in addition to the ability to make the purchase. Often a personal interview is required. While co-op boards are not legally allowed to discriminate, a board does not need to give a reason if it turns down a potential buyer.
The application to purchase in a typical condominium is not usually as complex or financially rigorous and for that reason, co-op apartments tend to be cheaper than equivalently-sized and appointed condos. In addition, many condominiums are built for the luxury market, so in the second quarter of 2016, the average sales price of a Manhattan co-op was $1,235,000, while the average sales price of a Manhattan condo was $2,843,000, according to a report from the Real Estate Board of New York (REBNY).
Financing a purchase in a co-op can be tougher than financing a purchase in a condo. That’s because co-ops typically require 20 percent down (which is often written as “80 percent financing allowed”). Very restrictive Park Avenue or Fifth Avenue co-ops might not allow any financing at all. Condos, on the other hand, can usually be bought for 10 percent down, and in some that meet Federal Housing Administration guidelines (which, be warned, isn’t a given in New York City), you can procure a loan on very favorable terms.
Common charges and maintenance fees
Once you own, you’ll find that you’ll end up paying common charges (to maintain the common areas in your condo) or maintenance fees (to maintain the building in your co-op). Co-op maintenance also includes payment of your share of the building’s underlying property taxes, while in a condo, those are paid separately to the city. Condominium property taxes are paid quarterly, but in a sales listing, the amount apportioned to a month is usually shown as “real estate taxes.” So if you are looking at a condo with property taxes of $6,000 a year, the listing will show real estate taxes of $500 a month, even though you’d actually pay the city $1,500 four times a year.
Subletting and pied-à-terres
The regulations governing in an individual building are laid out in the building’s bylaws and house rules, but generally condos are seen as more friendly to subletting. In the past, that has been seen by buyers as an advantage — as a lure to investors or as an “escape hatch” in case the buyer outgrew her apartment but didn’t want to sell immediately. However, with the rise of short-term rental companies, co-ops’ restrictions on subletting are sometimes seen as a positive: If you live in a co-op, you are more likely to see the same neighbors every day. Some co-ops like full-time residents; if you live out of town and are interested in buying a pied-à-terre, make sure that your intended co-op will allow that kind of part-time use.
Closing cost differences for condos vs. co-ops
In addition, co-ops have lower closing costs than condominiums. If a condo buyer finances his purchase, he will get a mortgage and be subject to mortgage recording tax, which is currently 1.925 percent of the loan amount for loans over $500,000. Co-op buyers don’t get a mortgage, so they don’t pay a tax. Instead, they get what is technically known as a “share loan” with their shares of stock and proprietary lease as collateral. If the buyer of a condo and the buyer of a co-op each borrow $1 million, the condo buyer will pay $19,250 more in taxes and fees than the co-op buyer! A condo buyer will also end up paying a few hundred dollars for a recording fee and possibly several thousand dollars in title insurance.
The day you sell…
Finally, when it comes time to sell, you’ll have to get your building’s approval. (The need for constant permission is why some people prefer townhouses!) If you’re selling a condo, the association has a right to buy the apartment, which is known as the “right of first refusal.” Typically a seller will apply for a waiver of that right, but be aware that it can take 30 days to process that paperwork. If you’re selling a co-op, you have to make sure that the potential buyer can pass the board. So even though the buyer’s broker will be preparing the purchase application, you’ll want to be sure to give it a careful and thorough review. Many buildings (more often co-ops than condos) also have transfer or “flip” taxes when an apartment is sold as well as fees that are paid to the building. So, you’ll need to make the buyer aware of those costs and possibly negotiate the division of payment between buyer and seller.