Condo vs. Co-Op: Know the difference before buying one

Condos and co-ops are similar — up to a point.  Ownership and financial issues are important distinctions.

The typical first-time buyer seeking to purchase a home in a city will probably consider one of two options: a condominium or a housing cooperative. Although they are similar, condos and co-ops are not the same, and it is essential to understand their differences before buying one.

Many people confuse condos with co-ops, thinking they are interchangeable. A condo is a private residence in a multiunit structure that includes ownership of commonly used property. A co-op is also a multiunit building, but that’s where the similarities end. A co-op owner has an interest or share in the entire building and a contract or lease that allows the owner to occupy a unit. While a condo owner owns a unit, a co-op owner does not own the unit.

Co-ops are collectively owned and managed by their residents, who own shares in a non-profit corporation. The corporation holds the title to the property and grants proprietary leases to residents. The lease grants permanent rights to residents to live in their units and to use the common elements of the cooperative according to the co-op’s bylaws and regulations.

The difference in costs. Co-ops tend to be cheaper per square foot. They typically offer buyers more control as an individual shareholder and often have lower closing costs.

Condos are often easier to finance. Obtaining a mortgage for a co-op can be tricky. Some lenders shy away from co-ops or require higher down payments.

Condo fees are usually lower. A co-op owner’s monthly fee can include payments for the building’s underlying mortgage and property taxes, amenities, maintenance, utilities and security.

The tax advantages of owning a condo or a co-op are about the same. If the owner has a mortgage, the yearly interest paid on the loan is deductible. Co-op owners also can deduct their share of the mortgage interest paid on the building’s underlying mortgage and their share of property taxes the co-op pays. Property taxes often are lower for co-ops than condos.

Living with the rules. An important distinction between a co-op and a condo is that most co-op associations require a prospective purchaser to be approved by the co-op board. The upside is being able to pick your neighbors. The downside is that when you sell, the board must approve the buyer and that can delay the sale. The board can reject applicants for only two reasons: financial or a refusal to abide by the association’s rules and regulations.

Some people worry that a co-op board has too much power. However, during the financial downturn, co-ops came through better than most condos.

Co-ops tend to have restrictions that limit secondary rentals and residents generally feel more invested in the property, which can foster a strong sense of community among shareholders.

It is much more challenging for a co-op owner to decide to rent their property. They typically have to get approval from the co-op board, and sometimes there are stipulations included in ownership documents that prohibit rentals. Buyers really have to understand the restrictions and make the best decision for their situation.

Condos and co-ops share several advantages: They are cheaper than buying a house, there’s no yard to mow, and a multiunit building can provide a sense of security and community.

The disadvantages are having to live within proximity of a variety of people, the association’s rules and regulations may feel onerous, and the monthly fees can be high.

Still, people in shared-ownership buildings often watch out for each other’s homes, help each other in times of crisis and develop friendships.