What is the difference between Co-ops and Condos in New York City?
The difference between Co-ops and Condos is a huge issue in New York City real estate. Depending upon which type of property you decide to purchase, your obligations and potential for liability will vary.
The main difference between co-ops and condos is that with condos you are buying a specific apartment while with a co-op you are purchasing shares of a corporation that provides you with a lease to your apartment. This difference has led to a divergence in the way purchasers should evaluate the two types of properties.
Maintenance fees in co-ops are typically higher than the corresponding common charges in condos. Condos call them common charges and co-ops call them maintenance fees, but essentially these monthly fees serve the same purpose, to provide for the upkeep of the building and cover operating expenses.
There are several reasons why co-op maintenances fees tend to be higher. One of the main reasons is because of the co-op’s corporate ownership structure and real estate taxes. The corporation that owns the building pays the real estate taxes and then distributes this cost to shareholders through maintenance fees. This is in contrast to condos where the apartment owners pay their own real estate taxes directly. Another reason is because most co-op boards often take out an underlying mortgage on the building to fund building improvements and pay expenses. This mortgage is separate and apart from the co-op loan purchasers take out to buy their specific apartment. The co-op building’s mortgage is primarily paid for by maintenance fees.
The Board of Directors makes purchasing a Co-op more difficult than a Condo. Because a co-op is a corporation, it is run by a board of directors elected by the shareholders, which are usually actual tenants of the building. This board is charged with operating the building and maintaining it’s financial health. In doing such, many co-op boards have stringent requirements for prospective purchasers. Most co-op boards will require purchasers to fill out a board package that require in-depth information on the purchaser’s financials and references. Further, these boards will often have restrictions on financing purchases, which can sometimes limit financing options dramatically. Co-op boards have the ability to reject any prospective purchaser without cause.
In contrast, condos are run by a Board of Managers, also elected by the residents of the building and perform the function of managing the building. Traditionally, condo boards do not have an approval process. However, more recently some condos have required prospective purchasers to submit application packages, which may vary in length and depth. Still, the condo board has a limited ability to reject a prospective purchaser as the board must either approve the purchaser or exercise a “right of first refusal” and purchase the property themselves. The use of the right of first refusal is relatively rare as most condo boards are extremely reluctant to purchase the property. Another factor to consider is that condos often do not have restriction on financing, so typically purchasers may finance up to 90% of their purchase.
Condos are generally better investment properties. Most condos are very lenient with subletting and using the apartment to generate a profit from renters whereas co-ops typically want purchasers using the property as their primary residence. Some co-ops do allow subletting, but there will be restrictions and red tape, such as no more than two-years subletting for every ten-years and final approval on all subletters.
Another issue to consider is that co-ops often impose a transfer fee, known as a flip tax, on owners that sell their apartment. This fee can be a flat fee or a percentage of the sale price, usually between 3-6%, and is customarily imposed on the seller. The flip tax fee goes into the building’s budget for maintenance and capital improvement. With condos, there usually is no fee from the building for selling an apartment, allowing sellers to retain more of the purchase price.
One advantage that co-ops have over condos when it comes to buying is that the closing costs for co-ops are considerably lower. This is because condo purchasers are buying real property while coop purchasers are buying shares in a corporation. There are costs associated with buying real property that aren’t required when buying shares in a corporation. Purchasers of real property should purchase title insurance and pay a mortgage tax in the range of .8% to 3% depending on the size of the loan. In contrast, co-op purchases do not have a mortgage tax because the financing comes in the form of a personal loan, and title insurance is unnecessary as only stock certificates, and not a deed, are being exchanged.
At the end of the day, condos will usually have a higher purchase price than comparable co-ops because condos come with far more liberty and far less stress. Prospective purchasers of condos have the peace of mind to know that they will not be highly scrutinized by the building’s management, have no major restrictions on financing, less barriers to resell, and may rent the apartment as an investment property. Although co-ops tend to have more hoops to jump though, these obstacles tend to make co-ops less expensive than condos. In addition, co-ops are easier to find as they represent a greater majority of the listings in NYC.
When looking for your next apartment, these are some things to keep in mind. If you have any questions or need help with your next real estate transaction, please feel free to contact us at the Kanen Law Firm.
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