For first time homebuyers, navigating the New York City housing market can be a challenge. Beyond finding the right home at the right price, buyers also have to weigh the differences and nuances of buying a Co-Op (also known as a Cooperative) versus a Condominium.
Physically, a one-bedroom unit in a Co-Op and a one-bedroom unit in a Condominium can look exactly the same. However, there are many differences such as the actual form of ownership, the application process and the way in which taxes get paid.
Let’s dig in and debunk the differences between the Cooperative and the Condominium once and for all, because this is New York and if you can make it here you can make it anywhere!
The Cooperative or Co-Op is a common ownership structure found mostly in New York City. According to various publications, approximately 75 percent of buildings in New York City are Co-Ops, which means potential purchasers are bound to run into Co-ops during a search for a home.
When a buyer purchases a unit in a Co-Op, they are purchasing shares in an apartment corporation, not the physical four walls of their unit. Technically speaking, buyers of Co-Ops are not called owners; rather they are referred to as “tenants” or “shareholders.”
The apartment corporation owns the building and each unit within the building is allotted a distinct number of shares based upon the size of the apartment. Instead of owning a piece of real property, the shareholder owns the allocated shares in the corporation. At closing, the purchaser receives a stock certificate that indicates the number of shares allocated to the unit and the shareholders name(s). The shareholder also receives a proprietary lease, which allows the shareholder to occupy the specific unit as an owner. The proprietary lease lays out the rules and rights of shareholders in the building.
The shareholder pays his share of monthly maintenance to the corporation. Maintenance payments are calculated based on the number of shares in the corporation that are allocated to the unit. The quantity of shares allocated to a unit is dictated by the size of the unit and floor level. A portion of the maintenance fees go toward paying the building’s mortgage, insurance, real estate taxes, building employee payroll and additional upkeep or operating expenses. A second portion of the maintenance fees goes towards paying the amount of property taxes apportioned to each unit. Since shareholders do not own any real property, they do not pay real estate taxes on their unit.
Each Co-Op has their own unique set of rules, commonly known as the House Rules, and it is important to review these rules prior to moving forward with a purchase. Many of the rules may impact whether a buyer wants to live in the building such as: the amount of money that may be used to finance a purchase of a unit (important if planning on obtaining a mortgage), rules on subleasing or renting an apartment (many Co-Ops do not allow subleasing or renting), pet policies, and rules regarding material alterations or construction in a unit.
Co-Ops are governed by a Board Of Directors, whose members are elected by the shareholders. The Board is the enforcement arm of the building; they make sure that House Rules are followed, and in extreme cases, they can evict a shareholder and force them to sell their unit for significant violations of the House Rules or the propriety lease. The Board normally works with an outside management company that manages the upkeep and performs the maintenance of the building.
For first time homebuyers, the application process can be one of the more frustrating and bewildering parts of buying into a Co-Op. Buyers are often required to complete a substantial board package with a lengthy list of requirements, including reference letters and detailed personal financial information. It is only after the submission of the board package that the Board will call a potential buyer in for an interview. The final step in the application process is “passing” the board interview, which means that the Co-Op‘s admission committee has given approval for the buyer to become a shareholder in the corporation. At this time, the sale can proceed to closing.
Unfortunately, a Co-Op board doesn’t have to give a reason for rejecting a potential buyer at any step during the process, as long as the rejection wasn’t based on “race, creed, color, national origin, sex, age, disability, sexual orientation, marital status, citizenship, occupation, or the existence of children.” The good news is that most Co-Op boards, if rejecting a buyer, will do so long before the board interview stage.
In New York City, Condominium buildings aren’t as common as Co-Op buildings, but most new construction now coming to the market is Condominiums. An owner of a unit in a Condominium is entitled to exclusive ownership and possession of his or her unit. What does this mean? In contrast to a Co-Op, a unit owner actually owns a piece of real property. This ownership is evidenced by a deed recorded in the county in which the property is located, as well as an undivided interest in the building’s common elements.
Condominium common elements are parts of the building that belong to all of the owners. This usually includes everything except the physical units where people live. In a typical building common elements include the lobby, hallways, rooftops, walkways, trash rooms, boiler rooms, heating and air conditioning systems, hot water systems, pipes, electrical systems and any fixtures within the common elements. The percentage of common elements allocated to each unit is calculated based upon the square footage of a unit and the location of the unit within the building. Therefore, a penthouse 3,000 square foot apartment is going to be allocated a larger share of the common elements, than a 600 square foot studio on the 2nd floor of a large building.
Condominium buildings are attractive to buyers because, ownership provides greater flexibility in subleasing and renting policies and in many cases a buyer can finance a larger portion of the purchase price. This allows Condo buyers to contemplate future use of their unit as an investment property.
In a Condominium, monthly maintenance payments are called common charges and can be much lower than those of a Co-Op because there is no underlying mortgage for the building (although an owner may have a mortgage on their specific unit). Common charges, which are paid monthly, cover the building’s operational and maintenance expenses. They are calculated by taking the each unit’s allocated percentage of the common elements and multiplying it by the total cost to operate the building. Condominium boards will often find creative ways to increase the amenities in the building without increasing common charges to make the building more attractive for buyers.
Each unit in a Condominium receives a separate tax bill from New York City, (as opposed to the Co-Op, where tax payments are factored into the monthly maintenance fees), and the condo owner is responsible for making the real property tax payment to New York City on time. Potential purchasers need to be careful when comparing common charge fees of a Condominium versus Maintenance payments of a Co-Op. The former does not include taxes, while the latter does.
Like a Co-Op, Condominium owners elect a Board of Directors who performs many of the same functions that Co-Op Board of Directors do. Due to the structure of the ownership interest in a Condominium, the Board generally has less enforcement power than their Co-Op counter-parts. A Condominium owner owns his physical unit, and thus a Board cannot evict an owner from an apartment. However, many Boards have the ability to fine unit owners for violations and force payment of any unpaid fines on the sale of the unit.
Buyers are often glad to hear that Condominiums typically have less stringent approval processes than Co-Ops. While, the financial and personal information requested of a potential buyer is usually on par with that of a Co-Op, a Condo Board is limited in what measures they have to keep out a potential buyer.
A Condo Board has a “Right of First Refusal” – a contractual right, found in the Condominium bylaws, that is used as a control mechanism for the building. A Condo Board may exercise their “Right” and reject a potential purchaser, but with some conditions attached. By exercising their “Right” the Condo Board must buy the unit on the same terms and conditions the seller is prepared to accept from the potential, external buyer. Fortunately, it is extremely rare that a Condo Board utilizes its Right of First Refusal. After a Condo Board has reviewed the prospective Buyer’s application package, they will issue a waiver of the Right of First Refusal, allowing for the scheduling of a closing.
Before You Buy
There are many factors that should be taken into account before deciding whether a Condominium or Cooperative is right for you. Potential buyers should do their homework with not only their broker, but also their attorney and tax professionals before signing any contract to purchase.