Regardless of the utility, each real estate purchase should be approached with an investor mindset. Evaluating your strategy, financial situation, and personal goals will help drive your decision-making process. Coupled with due diligence and analysis, take into account the costs associated, the expected timeline for holding the property, and the role the investment will play in your portfolio.
If purchasing in New York City for the first time, we advise homebuyers to start by understanding the differences between a co-op and a condo. While they share certain similarities, they differ in ownership structure, fees, and governance. By the end of this article, you'll be able to assess which form of ownership best suits your situation and investment goals.
Understanding the Main Differences
Supply & Demand
Cooperatives, or co-ops for short, make up about 75% of NYC's housing stock as well as almost 100% of the pre-war housing stock. While disproportionate, the supply of condos is expected to rise with the majority of new developments being structured as condominiums to meet market demands and appeal to a larger pool of buyers.
While both condos and co-ops are a form of shared or common-interest ownership, there are stark contrasts. When buying an apartment in a co-op building, you don't own the title to the property. Co-ops transfer ownership through stock, similar to a publicly-traded company. The buyer is allocated shares in the corporation (holder of the deed) and is granted a proprietary lease to occupy the space. Your allotment of shares is relative to the size of your apartment and includes a proportion of the common areas. Unlike their counterpart, condos are treated as "real property," in which the owner holds the title by deed.
The vehicle and structure for transferring ownership are significant because it affects your property taxes, lending options, and ability to transfer title.
Cost to Purchase
We encourage buyers to look past the list price and consider everything from the financing of the purchase to the monthly charges you'll incur throughout your tenancy.
When evaluating co-op apartments, you'll note that they're generally less expensive than condos in terms of price per square foot. Co-ops also have fewer closing costs as you're not required to purchase title insurance or pay a mortgage tax. Both of which are mandatory for a condo purchase. However, a co-op purchase could mean having to pay a flip tax -- a transfer fee charged by the co-op which is paid by either the buyer or seller. The cost is usually 1-3% of the sales price.
Condos offer more flexibility if you don't have enough for a sizeable down payment. Some co-ops can require a downpayment of 20-50% of the purchase price. With a condo, it's possible to get away with as little as 10% down. Additionally, co-ops usually require a buyer to have 1-2 years' worth of maintenance charges leftover in their bank account after they've made the down payment. This is the liquid assets requirement, and the exact amount will vary from one building to another.
Condos and co-ops handle the governance and maintenance of their buildings in a similar capacity. Both have a governing body of elected individuals, for condos, the Homeowners Association (HOA), and co-ops, a board of directors. Each is tasked with the responsibility of overseeing the management of the building rules and maintenance of the common area.
The key difference lies in how co-op boards handle applicants. Buyers need not only the money (or financing) for the purchase; they also need the board's approval before any deal can close. This extra step, known as the board application process, requires a lengthy board package to be submitted along with an in-person interview. The issue lies in the decisioning power of the board, without reasoning, the board holds the right to reject applicants.
By contrast, condo boards don't typically require any additional vetting once the contract has been signed. That said, condo associations do carry the "right of first refusal," but it's not commonly exercised. This is mainly because the association would assume the responsibility of purchasing the property should they deny a qualified applicant. Whereas, the seller for the co-op is burdened with the responsibility of re-listing the property.
Another difference can be seen in how co-ops tend to have stricter rules than condos. They may place restrictions on activities such as when you can practice your trombone, whether you can hang up decorations on your door, and whether you can harbor a pet. By far though, the most stringent rule and the one that puts off most investors and international buyers are the restrictions on subletting. It's rare for a co-op to allow shareholders to rent their apartments out for an extended period.
If you're uncertain about your timeline or willingness to make this a primary residence, you may lean towards a condo.
Condos and co-ops have monthly fees that each resident is responsible for paying. The cost of these fees depends on the size of the building and the amenities it provides. While the fees are similar, both are handled differently. Condo fees are called "common charges" and are paid monthly. This is used to cover the building's cost to upkeep the building and staff. Additionally, condo owners are billed monthly for their property taxes. This isn't included with the common charges as each individual unit is assessed separately on their property taxes.
Similarly, co-op owners pay "maintenance charges" each month that goes towards the building's upkeep and staff fees. The difference is that the maintenance fees also include at least part of the mortgage for the building and its property taxes. This is why co-op fees tend to be higher than condo fees. Fortunately, a portion of a co-ops maintenance fee is tax-deductible.
- Stricter subletting rules disincentivize the use of the property for investment purposes
- Higher monthly maintenance fees since the building's outstanding mortgage and property taxes are included
- Subject to a flip tax
- The board approval and interview process ensure due diligence is performed on all buyers
- Flexible declarations and house rules
- No board approval process, but the board can exercise their "right of first refusal."
- Ability to sublet the unit
- Lower monthly common charges