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Key differences separate
condos and co-ops
Dear Steve,
What is the difference between a condo and co-op
and which is a better buy?
-- Tyette
Dear Tyette,
There are many subtle differences, but here are the big ones upfront.
When buying a condo, you're purchasing
real estate and will basically own a deed and the airspace in your
domicile, plus a share of common spaces used by other residents.
When buying a co-op, which is short
for co-operative housing project, you become a shareholder in a
corporation that owns the building and you carry a leasehold interest
in your unit.
Some residents prefer co-ops because they're more
exclusive. Co-ops can impose strict guidelines for new buyers such
as minimum income or required cash purchases. In some co-ops, you
must show monthly earnings of four times your monthly obligations,
including mortgage, maintenance, other loans, credit card debt,
alimony or child support. You may also be subject to a more thorough
background check.
A co-op's board of directors usually runs its building
with a little more operational clout than a condo board. Their boards
also tend to restrict subleasing and prospective resale candidates,
although some (usually in the lower price ranges) are far more liberal
than others.
Condos, on the other hand, give you more flexibility
to sublet, plus there's generally no board review of prospective
occupants. You can use the place more readily for business purposes,
and your finances and other elements of your life are less likely
to be scrutinized. Condos generally just want proof that you have
obtained adequate financing for your space.
However, you'll probably find there are more "investment
units," and resultant vacancies, in condos. Hence, condo residents
tend to be a little more transient.
In a condo, you'll own an interest in the building's
common elements such as pool, tennis court and clubhouse, roof and
exterior. In a co-op, the corporation owns the common areas.
On the financial side, the amounts you pay for real
estate taxes and the interest portion of your personal mortgage
payments are tax deductible in both living classifications. Since
condos are considered real property, they qualify for homestead
exemptions (where applicable), while co-ops do not.
Some financial institutions won't lend money on a
co-op leasehold because their recourse is not as clear cut in the
event of default, although most co-ops have lists of approved lenders.
Both co-ops and condos can descend to heirs, although certain securities
considerations may be prevalent in willing a co-op. Make sure you
ask about all these details when you're meeting with property officials.
In a co-op, realize you're basically sharing the cost
of operating the building, including payment of the building's mortgage,
and if several shareholders go into default, the other shareholders
may have to make up the difference. But that's relatively rare.
It's also very important that you check what personal
property of yours is covered in the master insurance policy of your
co-op or condo, which should be evident in the association bylaws.
There's a chance you'll need additional insurance to cover your
belongings should your roof fall in or a pipe bursts.
But I wouldn't buy into either co-op or condo without
first getting an idea of who lives there. See who's coming and going
at peak hours, talk with a resident or two, or possibly a board
member. Ask them how competent the building's management company
is and how diligent they are about fixing the elevators and sprucing
up the grounds. Find out about recent capital improvements or plans
for any future ones and the reserve funds to cover them.
As to which is a better buy, that's your call, Tyette,
now that you have a thumbnail sketch of what each approach entails.
If you thinking of staying put for a while, a co-op may be more
suitable in terms of stability and security. If it's a quicker exit
strategy you want and a little less scrutiny, you might opt for
the condo.
In either case, good luck with your decision.
-- Posted: Feb. 14, 2004
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