real estate

How does a condo differ from a co-op?

Steve McLindenQuestionDear Real Estate Adviser,
I've been renting for years but am now thinking about buying a condominium or co-op on Long Island. I've been saving for my down payment and working on my credit score. What is the difference between a condo and a cooperative? What goes into buying either?
-- Dionne W.

AnswerDear Dionne,
Co-ops and condos, both of which are common-interest developments featuring for-purchase apartment units, require little or no maintenance on your end. No grass cutting and hedge trimming, no white picket fences to mend. Both impose monthly maintenance fees for exterior work and services that are done via contracts arranged by the boards of directors. Typically, each unit owner pays a monthly fee for exterior and grounds maintenance, including water, sewer and cable TV. Insurance to cover any damage to the grounds and building, though not the contents in each unit, is also pretty standard.

That's how they are similar. Here's how they are different.

A condo is considered real property with ownership evidenced by a deed that allows you to occupy the living space as you see fit. You'll pay closing costs similar to buying a house when you purchase a condo. There are closing costs on co-ops, too, but they are smaller.

A co-op is considered personal property evidenced by ownership of shares of stock in a "corporation," combined with a proprietary lease allowing each shareholder the right to occupy the space, but with specific restrictions. Condo owners can deduct payments made for property taxes and mortgage interest. Other than deducting a proportionate share of the interest and property tax on the co-op's underlying mortgage, the co-op resident will probably have fewer deductions.

Because there are fewer condos in New York, they are typically more expensive than co-ops, though down payment requirements are generally smaller for condos than for co-ops. Financing for a condo is also usually more flexible than for a co-op. But there is typically more price instability in condos during downturns. In fact, some lenders shy away from condo loans because the Federal Housing Administration and Department of Veterans Affairs are reluctant to back them, particularly if less than 50 percent of the units in a condo complex are occupied by their owners.

Some believe the screening process for a co-op is too intrusive. You will have to account for all your assets and may even be asked where those assets originated. Selling your co-op might also be a hassle because of these boards' tendency to intensively scrutinize would-be buyers. The co-op structure would also make it very tough -- if not impossible -- for you to rent out the facility or sublease it should you need to move suddenly.

Of course, many stability-minded residents are quite happy with such scrutiny because it screens out shady or otherwise problematic residents and makes their co-op developments more homogenous. Condo complexes tend to have more of a transient feel because there are fewer selling and subleasing restrictions.

"Fixed" expenses are not necessarily set in stone at either, where boards can suddenly approve new "unbudgeted" expenditures and assess their owners to pay their share. Don't be afraid to do a little scrutinizing of your own. When you are being interviewed, ask the co-op or condo board what kind of expenses are likely to arise soon and what charges are likely to be passed along to you. In either case, chat up a few residents if you can and ask if they're satisfied with the board, their expenditures and the overall culture of the complex. When a number of units suddenly go up for sale in either a condo or co-op complex, that could be a warning sign of a systemic problem. The co-op and condo bylaws should always be carefully examined, ideally with the aid of a lawyer.

Kudos to your down payment thriftiness and your rapt attention to your credit score. That sort of diligence always pays off. And good luck on your choice. Make sure you tailor it to your lifestyle and future mobility plans.

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