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The Real Estate Adviser

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.

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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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