Co-op or Condo?

The first step in the NYC buying process is to decide whether you're a better fit for a co-op or condo. 

NYC apartments come in two flavors: Co-op (short for "cooperative") and condominium.

Or, like many people, you may simply decide to look for the best apartment you can afford in a financially sound building, be it co-op or condo.

Here's a quick overview of the key differences and considerations.

Ownership structure

Photo Credit / Barrons

CO-OP:   While co-ops are common in NYC, most people in other parts of the country are unfamiliar with their unique ownership structure.

In a co-op, the entire building is owned by a single corporation. Instead of a deed, buyers get shares (stock certificates) in the corporation, and a proprietary lease that allows buyers to occupy a specific unit and lays down the rules and rights much like a lease in a rental building.  (In fact, technically speaking, buyers of co-op apartments are referred to as “tenants” or “shareholders,” not “owners.” )

CONDO:  Buying a condo is very much like buying a single-family house.  You get a deed to the apartment that gives you ownership of the interior of your unit and the surface of its walls, as well as an undivided interest in the building’s common elements. This is the type of ownership almost everyone has in mind when they think about buying a home, and almost all newer buildings are condos.

After you buy your apartment, you will largely find that the legal ownership structure has little impact on your use of it. However there are a number of quirks related to each that will be discussed further below.

Co-op and condo boards

CO-OP:   Shareholders elect a volunteer co-op board that--except in some very small buildings that choose to save money by self-managing--works with a property management company to oversee the care and maintenance of the building.

The board also creates and enforces rules about everything from renovation inside units, to what’s allowed to transpire on the roof deck, to whether you can speak on your cell phone in the lobby, or whether dogs will be allowed in the building.  Unlike condo boards, co-ops can even evict an extremely disruptive shareholder and force them to sell their apartment.

Overreaching, power-hungry co-op boards are the stuff of legend here, and some of the stories are true. However, at least as many co-op boards are made up of volunteers with full-time jobs and families who try to make the best of what is a demanding and time-consuming role if done right.

CONDO:   Condo owners also elect a board of directors that perform many of the same functions as a co-op board. Generally speaking, though, most condo boards tend to be more hands-off when it comes to rulemaking.

That slightly more laissez-faire approach is partly due to philosophical underpinnings (more on that below) and partly because condo boards wield less enforcement muscle: They can fine owners only for the expense related to any rule infraction (or get an injunction to stop it from happening again). But because a condo owner actually owns his or her unit, a condo board, unlike a co-op board, can’t evict an owner from an apartment.

Note: In both co-op and condos, your voting power increases with the size of your apartment.

Monthly charges and assessments

CO-OP:   Co-op shareholders pay a monthly maintenance fee. Part of the fee goes toward the expense of operating the building. The other part is the amount of property taxes apportioned to each shareholder based on the number of shares assigned to each apartment.  Particularly these days, when property taxes and fuel costs are rising sharply, maintenance fees are frequently adjusted upward each year (3%-7% annual increases are quite common).

In addition, co-op boards can require shareholders to pony up extra cash from time to time to boost the reserve fund or pay for a specific project.  In a 40-unit building, for example, an assessment to replace an elevator might run $8,000-$15,000 per unit, depending on how many shares you own. Typically, shareholders can spread their payments out over a period of time such as 6 to 18 months.

CONDO:   The monthly charges in a condo building are referred to as common charges. Property taxes are not included; individual owners are billed directly by the government. This is an importance nuance to keep in mind when comparing carrying costs of co-ops to condos, because at first glance, condos may look cheaper on a monthly basis.

Like co-op boards, condo boards also levy assessments when necessary.

Monthly charges in both co-ops and condos tend to increase with the expansiveness of amenities and staff. However, larger buildings have economies of scale when it comes staffing and operation that are often reflected in lower common charges.

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Approval to buy

CO-OP:    We’ll go into more details about the approvals process below. but for now, let’s start with the fact that a co-op board can turn down a buyer for any lawful reason. And because the reason need not be divulged, this means that in practice, unlawful reasons (race, religion, profession, sexual orientation, nationality, etc.) may also prompt a rejection. (Note: If you buy an apartment directly from the sponsor. you will not need board approval at all.)

CONDO:   For various reasons, most condo buyers these days are subjected to nearly as much financial and personal scrutiny as co-op buyers. But rather than being turned down outright, pretty much the worst that can happen to a condo buyer is that they wither away on the vine while a board engages in deliberate stalling tactics. Stalling is about all an unenthusiastic board can do, except for buying the place outright via the right of “first refusal”—which virtually never happens.

Minimum downpayment and liquid assets

CO-OP:    Most co-ops require buyers to put down 20-25% of the purchase price, about the same as what most lenders require these days.   But the range can be vast, depending on the co-op—anywhere from 10% down (very rare) to 50% or more at higher-end buildings.

Co-ops also expect you to have sufficient money left over (also known as ‘liquid asset requirements’). The required amount can range drastically, from a few months worth of maintenance payments to 1 to 3 times the purchase price of the apartment. Two years worth of mortgage and maintenance charges is about average.

In addition, each co-op will expect you to meet a debt-to-income ratio, usually around 25%-29%. That means your total monthly payments--mortgage and maintenance--cannot exceed the specified percentage of your gross income. An excellent credit score is also required.

Add them all up, and you will find that the average co-op's financial standards are much higher than the average mortgage bank. a primary reason NYC co-ops withstood the recent recession so well.

CONDO:   While in recent years, some condos have started to require co-op-sized down payments, most typically don't have any financing limits.  Bear in mind, though, that if you’re getting a mortgage, banks these days often require 20%, unless the building qualifies for an FHA loan, which carries a 3.5% downpayment requirement, or you and the apartment qualify for a SONYMA loan, which has a 3% downpayment.

Many co-ops and condos these days require buyers to put an additional one to two years of common charges in an escrow account as insurance against nonpayment. The odds of this happening to you increase along with the perceived 'riskiness' of your application, as measured in debt-to-income ratio, U.S. citizenship status, or a variety of other factors.

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Part of the reason co-ops tend to cost less is because they are typically older, lacking the bells and whistles of the tens of thousands of new condos constructed in the past decade. Many newer condos have also secured property tax abatements that enable developers to command higher sales prices than if buyers had to pay full tax bills right away.

Another reason co-ops are cheaper is that buyers usually must be approved by a board. That process involves a mountain of paperwork, a personal interview, the possibility of rejection, and the total (and totally one-sided) opening of your financial kimono to folks you will share the elevator with for years to come.

In addition to higher purchase prices, condos also have substantially higher closing costs if you’re taking out a mortgage: You will pay a mortgage recording tax of 1.8% of the mortgage amount for loans under $500k or 1.925% for loans above that.  Also, your lender will require you to buy title insurance, which costs about .5% of the purchase price.

(Note: The New York State legislature is trying to extend the mortgage recording tax to co-op purchases as well.)

If you're buying a new condo (versus a resale), transfer taxes (1.825% of purchase price for properties over $500,000, and 1.425% for properties under $500,000) are also your responsibility, though these can often be a point of negotiation with a developer, who is more apt to cover fees like this than reduce the sales price, which can affect future sales.

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