Co-ops and condos: The pros and cons of each

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Nearly 74 million Americans live in community associations, according to the Community Associations Institute, with the number of associations steadily growing to somewhere between 352,000 and 354,000 in the past year. Two of the most common types of these associations are condo associations and housing cooperatives, or co-ops. Here are the differences between the two.

Condo vs. co-op: What’s the difference?

Both condos and co-ops are similar in that residents live in separate units with shared common areas, such as a pool, recreation center or playground. The key difference between a condo and a co-op is the ownership structure.

When you buy a condo, you own the unit and a percentage of the common areas. When you buy a co-op, you actually purchase a share of the property, and your lease enables you to live in a unit. Think of co-ops the same way you might think about investing in the stock market: You don’t own the unit, but you’re a shareholder, so you do have a say in how the co-op is run.

Here are the other primary differences between a condo and a co-op:

1. Price

In terms of overall price, a co-op is often cheaper than buying a condo, according to the National Association of Housing Cooperatives (NAHC).

However, the down payment for a co-op can be high. While condo owners can take advantage of lower-down payment mortgages, such as a 3 percent conventional loan, most co-ops require a down payment of 10 percent to 20 percent, according to the NAHC. In some cases, that requirement can be significantly higher, too. In Manhattan, for example, it’s common to see a 50 percent down payment requirement for co-ops.

There’s another trade-off, though: Closing costs for a co-op are likely to be lower than the final expenses on a condo, as you won’t need to pay for some fees, like title insurance.

If you have plenty of upfront cash, the lower price of a co-op can be appealing. If you’re in need of a loan, though, a condo might be a better move. Keep in mind that mortgage lenders are more likely to issue loans for a condo than a co-op. That’s because if a borrower defaults on a condo loan, the lender has real property to deal with rather than shares, which can be harder to sell.

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2. Fees

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.

For example, if a co-op shareholder owns 2 percent of the property, they will pay 2 percent of the electric bill. For residents 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 prefer the simplicity of one monthly bill. Condo owners pay their utilities and tax bills 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,” explains Leslie White, principal agent at Redfin in the Washington, D.C. area. “My advice is to break down the costs and do a side-by-side comparison to get an accurate picture of what [you] will pay each month.”

Condos have fees, too. You’ll pay HOA fees for being part of a condo association, and the cost of those fees can vary dramatically depending on what the association offers in the way of amenities and services. For example, if your condo is in a high-rise building with a gym and a doorman, your HOA fees might be higher than if you owned a small walk-up with limited amenities.

When it comes to property taxes, a condo owner pays tax on the unit’s assessed value, while a co-op shareholder pays a portion of taxes on the entire property. So, if the shareholder has a 10 percent stake, they are responsible for 10 percent of the overall property tax bill.

3. Governance

Condos and co-ops operate similarly in terms of how the shared space is maintained. Condos have condo associations, and co-ops have a board where members can vote on changes or additions 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. If you’re weighing the pros and cons of a co-op, that governance arrangement can be a significant drawback if you want to sell your membership share. The co-op board can turn down your buyer for any number of reasons.

The association or board usually limits how you can alter your space, too. For instance, a co-op or condo owner can paint the interior of their unit any color they wish, but they might have to conform to rules if they want to paint the exterior.

4. Renting or selling

If you’re weighing the pros and cons of buying a co-op, you can put the ease of selling or renting it to a tenant in the “con” category.

Condo owners can often sublet their units, although some associations have restrictions on the percentage of condos that can be rented at any given time. Renting is typically not allowed at all in co-ops.

Furthermore, it’s usually much easier to sell a condo because there isn’t the extensive interview process involved. In general, 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,” says White.

By comparison, a co-op board can turn down a buyer based on any number of reasons, such as their 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.

5. Amenities

The fees you pay to be part of either a condo or co-op community can give you access to amenities such as a pool, rooftop deck or gym. Condo communities are generally known to offer more amenities, but co-ops can offer similar perks, too. If a clubhouse, bocce court and other shared offering is important to you, be sure to consider these when deciding between a condo or a co-op.

6. Availability

You can find condos for sale in every major city in the U.S., but these units are also becoming more widely available in smaller towns. Co-ops, on the other hand, are much less common in many parts of the country.

The majority of co-ops were formed before the mid-1970s and can be found in places like Philadelphia, New York City, Chicago, Seattle and other major metro areas, according to the NAHC. If you’re looking to live somewhere more rural, chances are you’ll struggle to find co-op options.

Bottom line

Given the pros and cons of both condos and co-ops, the first step in figuring out which one is more viable for you is to consider how long you plan on living in the unit. Since co-ops are cheaper upfront, long-term residents might end up saving quite a bit of cash compared to buying a condo.

Another potential benefit? Co-ops essentially allow you to handpick your neighbors. The grueling interview process gives you a closer 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 condo bylaws might limit the number of renters in a community, condo owners have the option of subletting their unit, and generally an easier time selling.

As you weigh your options, be sure to understand the association or board rules. You want to be sure you’re not signing up for rules that might impede your lifestyle or goals. White also recommends asking the board or association if there are any current issues being worked out or upcoming changes that will affect residents, as this can help inform your decision.

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Written by
David McMillin
Contributing writer
David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Mortgage editor