It’s a common question for homebuyers who like the idea of owning their own space without the added duty of mowing lawns and maintaining pools: what’s the difference between a condo and a co-op?
Both condos and co-ops are similar in that residents live in separate units in a single building with shared common areas, such as pools, recreation centers and playgrounds.
The key difference between the two are how they’re owned. When you purchase a condominium, you buy your dwelling and a percentage of the common area.
Conversely, when buying a co-op, you are actually purchasing a share of the building; the same way you would buy a share of a company, so you don’t own your unit or living space but you do have a vote in how the co-op is run. Co-op residents are known as shareholders and their lease enables them to live in an apartment in the building.
Co-op owners tend to get a better deal on the price per-square-foot than their condo-owning counterparts.
Appraisal firm Miller Samuel reports that Manhattan condo buyers spent $2,061 per square foot in 2016 — $729, or 62 percent, more than co-op buyers.
On the other hand, banks are more likely to issue loans for a condo than a co-op. If a borrower defaults on a condo loan, then the banks have real property to deal with rather than shares of a stock, which can be harder to sell.
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Co-op fees tend to be higher than condo fees because co-ops roll all the monthly expenses into one bill, including gas, water and property tax. Condo fees just include routine maintenance, which can vary dramatically depending on the property.
For example, if a co-op shareholder owns 2% of the building then they will pay 2% of the electric bill. For people who travel a lot or might not use that much electricity each month, this model could be a waste of money.
On the other hand, this might be convenient for those who don’t want to worry about paying utilities separately and like the simplicity of one monthly bill. Condo owners pay their utilities and tax bill on their own, so those costs are not reflected in the monthly fees.
“When buyers see these enormous fees, they just put on the brakes and say, ‘no way on the planet am I paying that much money,’ but they will probably spend that much in a condo,” says Leslie White, lead agent at Redfin. “My advice is to break down the costs and do a side-by-side comparison to get an accurate picture of what they will pay each month.”
Condos and co-ops operate similarly in terms of how the public space is maintained. Condos have condo associations and co-ops have a board where members can vote on changes, additions and modifications to existing rules and policies.
The most important difference between their governing bodies is in the vetting process for new residents. Co-ops are notoriously more stringent in who’s allowed to buy, often requiring background checks, referrals and other personal information.
The association or board usually limits how you can alter your space. For instance, a co-op or condo owner can paint the interior of their unit any color they wish but the exterior must conform to outlined rules. The association or board might have the last word on your paint job.
Co-ops are less expensive because they’re designed for long-term residency rather than as an investment tool. Condos appeal to investors who want to put their money in real estate to avoid market volatility.
Condo owners can sublet their units, which is typically not allowed in co-ops. Furthermore, it’s usually much easier to sell a condo because there isn’t the extensive interview process involved, which is another reason for the higher price.
Condos are “for people who are planning to expand in the near future, get bigger homes, and want to sell or rent out their current home,” White explains.
A co-op board can turn down a buyer based on any number of reasons, such as price offer or credit history. If a board wants to wait for a higher selling price, so that the perceived value of the building doesn’t diminish, then the shareholder is at their mercy.
Assessing your options
Given the pros and cons of both types of properties, the first step in figuring out which one is more viable for you is how long you plan on living in the space. Since co-ops are cheaper upfront, long-term residents might end up saving quite a bit of cash in a co-op.
Another potential benefit is the fact that co-ops essentially allow you to handpick your neighbors. The grueling interview process gives you an intimate look at who you’ll be bumping into in the common areas.
In contrast, owning a condo might help you diversify your investment portfolio. While condominium bylaws may limit the number of renters in a complex, condo owners have the option of subletting their condo or selling.
Finally, be sure to carefully read the association or board rules. You want to be sure you’re not signing up for rules that might impede your lifestyle. White recommends asking the board or association if there are any current problems being worked out or upcoming changes that will affect residents.