The difference between a condominium and a co-op
Both are forms of property ownership. By purchasing either a condo or a co-op, you will enjoy property appreciation and certainly some tax relief, while someone else takes care of common items: landscape, swimming pool, washer/dryer room and other common areas. Day-to-day life in both is pretty much the same and a resident would probably not notice any difference.
Co-op and cooperative are short for cooperative housing project and were common long before condominiums hit the scene. And as a practical matter, there is no significant advantage or disadvantage to a cooperative vs. a condominium ownership. In general, condos are considered real property while a cooperative is considered intangible personal property. Many lenders will not lend money on a co-op at all. Therefore, a savvy mortgage broker is often the best place to shop for a loan. Another way to obtain financing for a co-op is to simply obtain a list of “approved” lenders from the board to help you with your financing options. These lenders often have fewer mortgage options available, often requiring a larger down payment and charge higher interest rates. Another disadvantage of co-op ownership is the fact that most co-op owners cannot get a home equity loan and each individual owner is dependent upon the solvency of the entire project: If the corporation were to file for bankruptcy, all the shareholders would suffer!
Co-ops have the advantage when it comes to costly repairs or capital improvements as they can borrow the needed funds adding to the amount of the blanket mortgage. Condos cannot borrow monies as an entity and if costly repairs or improvements are undertaken, large assessments could cause condo owners financial hardship.
In a cooperative building, the owners do not buy their individual apartments. Instead, they buy shares in the corporation that owns the building and real estate, and those shares are allocated to a specific apartment. Shareholders receive a long-term proprietary lease for the apartment. Real property descends to your heirs while the co-op’s stockholder’s shares pass to your personal representative and may be subject to securities regulations.
Often, there is a mortgage loan on the building that is paid by the cooperative corporation. The cooperative that owns the building must pay the property taxes, building mortgage expenses, electrical charges, fuel charges, payroll and other costs of operating the building. These expenses are referred to as maintenance charges, and the buyer of shares for an apartment pays a portion of the operating expenses, that are tax deductible to various percentages depending upon the individual development. The building is managed by a board of directors elected by the owners of shares, and the board is governed by corporate by-laws. The rights and obligations of the share-owner (apartment owner) are explained in the lease and by-laws of the corporation.
A condominium, on the other hand, is a form of ownership in which the buyer purchases an apartment itself plus an individual interest (fee simple) in the common areas such as the land, exterior walls, roof, lobby, stairway, hallways, heating and electrical systems and other recreational areas. The apartment owners are responsible for a proportionate share of the cost of maintaining common area expenses, and generally pay their own utilities, taxes, etc.: Most building repairs and maintenance are covered by the common charges. A condominium is governed by a board of managers elected by the apartment owners. Its functions are the same as a board of directors (in a Co-op) and its authority to operate is known as a condominium declaration. There are also detailed by-laws providing for the conduct of the affairs of the condominium.
Before purchasing either a co-op or condominium, you should consult with a knowledgeable tax advisor and attorney!