Interview: Co-op or Condo?

co-op or condo

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Condominiums are everywhere, but apartment “co-operatives” are mainly an NYC thing.  These two forms of ownership appear similar, but there are important differences between them that can affect the price of the unit, the process of buying and selling, and even your monthly mortgage and maintenance costs.

I recently asked Kurt Roth, a real estate attorney in New York City, to explain the difference.

What is a Co-op?

Industry professional may talk about co-op apartments as if they’re real estate, but in fact, they’re not. When you buy a unit in a co-op, you’re actually buying shares of stock in the “cooperative corporation” that owns the physical property: the apartment building. When you become a shareholder, the co-op corporation gives you a “proprietary lease” that entitles you to occupy the apartment. Your monthly maintenance charges will include a tax-deductible contribution to the building’s mortgage payment and real-estate taxes, as well as a contribution to the costs of running the building.

A co-op’s Board of Directors has an additional responsibility that the Board of a condo doesn’t have: they review all proposed sales and sub-leases in the building. Along with that responsibility comes the authority to deny any application for a sale or sub-lease WITHOUT EXPLANATION, if the Board feels it isn’t in the building’s interests. As part of this review process, a co-op Board usually requires a detailed application from any prospective buyer or sub-tenant, and often requires a personal interview with one or more Board members. The application can ask for any or all of your current and past financial information, whether or not it’s directly relevant to your ability to afford the sale or sublease. This usually includes several years’ worth of personal tax returns, as well as documentation of your assets and liabilities. Many co-op boards also require you to submit business and personal references that are subject to verification.

For those who value their privacy, the co-op application process can be difficult. Each Board has its own style or personality, and some have much more stringent requirements than others. Knowing how a particular co-op board approaches the application and approval process can be very important when deciding whether to make an offer. An experienced real estate agent or broker should have this information and be able to advise you of potential pitfalls.

Why buy a co-op if you have to go through that?

For one thing, the buyer’s closings costs for a co-op unit are significantly lower than those for a condominium unit. For example, the buyer of a Brooklyn condo unit with a price of $725,000 and a mortgage of $480,000 paid just over $13,900 for mortgage tax and title insurance, including the requisite title searches. Had the unit been in a co-op, the purchaser would only have paid about $600.00 for the same services. For another, it provides some assurance that your fellow owners (or their subtenants) will be able to meet their financial obligations to the building so that the building can continue to operate responsibly.

What is a condo?

Condo ownership simply means that you have a deed to your property, usually an apartment, and share use and control of the common elements, ie elevator, heating system, roof, hallways through an association of the individual owners of each apt.

Common charges cover the real estate taxes for the shared areas, the physical maintenance of the property and costs of water and heating fuel.

Unlike a co-op board, a condo board can’t turn down a prospective buyer or prospective tenants. However, it does have a “right of first refusal” regarding sales and rentals. This allows the Board to supersede any proposed sale or sublease by purchasing or renting the unit itself, at the same price the seller or lessor would have otherwise received. Boards rarely exercise this right, but they do use it as a basis for reviewing every proposed sale and rental in the building. In many buildings, this process involves detailed applications and substantial costs but for the most part does not require an interview before the board.

 

That was helpful.  Thanks so much, Kurt!

Kurt Roth real estate attorney

Buying an apartment in NYC?  Attorney Kurt Roth has been helping clients navigate the complexities of residential real estate transactions in Park Slope, Brooklyn Heights, and throughout NYC for over 25 years.  Please visit his website at http://dicklerroth.com

Kurt Roth is not affiliated with Raymond James Financial Services.

The example mentioned above is for illustrative purposes only.  Actual investor results will vary.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Links are provided for information purposes only.  Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.  Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. 

 

photo credit: lumierefl via photopin cc

 

About Sara Stanich

Sara Stanich, CFP®, CDFA™, works with people who are building their lives – growing a business, raising a family, moving toward personal achievements – to help them build solid financial plans for the future. Have a financial question? CLICK HERE TO ASK SARA!

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