Since opening our brokerage firm we’ve had several buyers start out looking only at condos and end up looking at co-ops as well.  I’m a strong advocate of condominium living and most of the time I find buying a condo will ultimately prove a long-term investment than buying a co-op.  That being said, understanding the differences is important because of how many New Yorkers live in or may at some point live in a co-op.  Indeed New York is the co-op living capital of the world and most other cities don’t quite understand this phenomenon.

So why might one consider a co-op?  Well, they’re cheaper.  That’s the most compelling reason and most of the downsides to co-op living must be weighed against that advantage.  The other potential advantage is the filtration process associated with co-ops.  Because each building has specific requirements regarding income and assets, some believe living in a co-op makes it more likely that your neighbor isn’t a drug dealer or someone who can barely scrape together their monthly carrying costs.  Here are some of the other major differences:

Ownership – Put simply, you don’t actually own your apartment in a co-op.  You own a percentage of the building which generally corresponds to the size of your apartment.  The big difference between this and a condo, where you own your specific unit, is that co-op shareholders need to split the costs of building maintenance.  This is generally done through monthly maintenance payments along with special assessments.  Your real estate taxes, which are based on how many shares you own, are often bundled into the monthly maintenance payments as well.  Condos tend to have lower monthly payments after shelling out presumably higher asking prices. Co-ops have a board of directors which holds monthly meetings to discuss the various issues affecting the building.

Financing Restrictions – Some people pay cash for their apartments, but the large majority take advantage of financing because then you only need to put 10% or 15% down on your home—sometimes less.  If you’re trying finance a condo you only need to worry about your own qualifications with the lender.  With a co-op you need to also consider the co-op board’s equity requirement when buying, often 20% but sometimes 25%, 50% or higher.  If you think about how tough it’s been getting a loan lately, buying into a co-op just increases the difficulty of getting a quick loan from the bank.  Some banks won’t even finance a co-op, not because the potential risks are so great, but rather it poses more operational challenges and costs to the bank.

When you eventually sell your co-op, your buyer must be approved by the co-op board.  While this may not be a problem, it is a risk you run, especially if you are trying to sell your apartment in a hurry.  Many co-ops also impose a ‘flip tax’ which is paid by the seller and juices up the building’s reserve fund.  Good concept—protects the co-op shareholders, but it stings on the way out.

Ironically, the most expensive and prestigious apartments in New York are co-ops.  Some of them are so exclusive it rivals a private club.  Prime examples would be 740 Park Avenue, 960 Fifth Avenue, and 998 Fifth Avenue.  These people treasure the communal aspects because they’re mutually beneficial, rather than detrimental.

This is the basic overview.  If you’re buying a first home and are trying to land a 1-bedroom for $500,000, you’ll have a hard time living in any of the condos we’re writing about on the site.  However, if you understand the advantages and can stomach the higher asking prices, condo owners will generally have a more stress-free experience.

Questions or comments? We’d love to hear your thoughts.

James

This entry was posted on Sunday, March 9th, 2008 at 2:30 pm and is filed under NY Condo Blog. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.