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Co-Ops vs. Condos

What's the difference between a co-op and a condo?

Condos and co-ops are attractive alternatives to single-family home-ownership. For those who are young and starting out, these types of properties offer a taste of what it is like to own a property. For those who are older, condos and co-ops allow for an easier living lifestyle without maintenance worries.

Both co-ops and condos are considered common-interest developments. In a co-op, people technically don't own their apartments as they do with in a condominium. Instead, people own shares of the corporation that owns the building. The larger the living unit, the more shares owned in that corporation.

Typically, co-ops are less expensive per square foot than condos, and their maintenance fees—which cover building expenses like hot water, heating, air-conditioning, grounds maintenance, staff salaries, real estate taxes and insurance—are tax-deductible.

There are some co-op caveats. All prospects typically have to be approved by the co-op's board of directors, and the vetting process can be quite thorough. There are lots of demands for personal-background and personal-finance information, comprehensive employment history and background checks.

It's also harder to sublet a co-op, and in many cases that is not allowed at all. Moreover, some co-ops can require larger down payments than condos, and sometimes there are even restrictions on owning other properties. Co-ops also have requirements in regards to debt-to-income ratios, and have limits to their occupant’s percentages.

Selling a co-op can also be a little more difficult than selling a condo. Some boards assess a "flip tax," where every time the co-op is sold, a fee is paid to the corporation. The flip tax can be paid by the seller, buyer or both depending on the rules and regulations of the corporation. It is not actually a tax, however, and not deductible as a property tax. It is considered a transfer fee payable upon the sale of an apartment to the co-op.

Flip taxes are considered a method to help raise money for a co-op's overhead expenses without raising the maintenance fees or assessing charges to residents. There are several types of flip taxes in a co-op, and they can either be a flat fee, a dollar amount based on shares allocated to the subject apartment, a percentage based on the sales price, or a fee based on the duration the seller has owned the apartment.

Unlike the purchase of a co-op, buying a condo is more like buying a house because buyers own their deeds and pay their own taxes. While condos are normally more expensive than co-ops, percentage down-payment requirements can be smaller, though today's more stringent lending standards have tweaked that equation a little. Normally condos can also be sublet much more readily than co-ops.

Condo boards also wield less power than co-op boards, and entry requirements are not always as rigorous. Unlike co-ops, condo maintenance fees are not tax-deductible.

In New York City, about 70 percent of all individual apartment units for sale are co-ops, a number that has dropped from about 85 percent a decade or so ago, as more condos have been built to replace older co-op buildings.

Sol Skolnick August 25, 2012 at 09:28 PM
It is also important to note that there a fewer banks that will lend for coops than condos. In a coop you are purchasing shares and the right to be the "tenant" in the apartment associated with your shares. Not all lenders are comfortable with that dynamic. When considering buying a unit in a condo you should find out if the building is warrantable and the percentage of units owned by a single entity whether it is the sponsor or another investor. It is far more difficult to obtain financing for purchase or refinance when the condo does not meet Fannie Mae guidelines.

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