What’s the Difference Between a Condo and Co-op?

Are you a little confused about the difference between a condominium and a cooperative? You’re not alone.

It’s easy to be confused since co-ops and condos do look similar from the outside, even have some of the same amenities, and day-to-day living is pretty comparable.  However, they are very different when it comes to purchasing or selling.

Co-ops are rare in our suburban southern NJ / southeastern PA market, but they are more prevalent in the cities, especially within the Rittenhouse Square area in Philadelphia. 

Condos and Co-ops are good options when looking for a home. You just need to know if it’s the right fit for you.  Here are highlights of their differences:

History Lesson

Co-op:  Co-ops were once available only to the wealthy. However, today they can also be a source of affordable housing, especially when a rental building converts to a co-op through the use of public funds. You’ll find such co-ops for low to moderate incomes throughout different areas.

Condo:  Many new residential buildings are going the condo route since it’s easier to get investors involved to finance, and easier and quicker to sell and to sell for more than their co-op competitors.

Ownership

Co-op:  You aren’t buying actual real estate but are buying stock in a company (i.e. non-profit association or limited liability corporation) that owns the entire property, including all of the residential units. As a shareholder, you’re entitled to reside in the building and enjoy all of its amenities. You take on a long-term “proprietary lease” or sign a contract. The size and location of your apartment determines the number of your shares and cost to purchase.

Condo:  You are buying actual real estate and own that specific condo unit and everything within its four walls. It’s just like when you purchase a single-family house and receive a deed for the property. However, it is also like buying into a “business” too. As an owner within this condo community, you also have a shared fiduciary responsibility with the other owners for the common areas (land, hallways, lobby, pool, gym etc.).

Monthly Fees

Co-op:  Shareholders pay monthly maintenance fees that contribute to the cost of maintaining and operating the building. However, these fees also go toward the entire association’s property taxes and any mortgage on the entire building (called a blanket or underlying mortgage). Some or all of the fees are tax deductible for shareholders. 

Because a co-op is taxed like a corporation rather than real property, your taxes are a lot less, which can sometimes help you save a few hundred dollars per month! 

Condo:  You’re responsible for monthly condo association dues that contribute to the overall maintenance of the building. However, condo owners are responsible for their own property taxes for their individual unit.

Buyer Requirements

Co-op:  In order to live in the co-op, a prospective buyer is screened by its board of directors/membership committee. It will look at your financial ability to live there and if you’re willing to comply with the rules and bylaws of the association. No one can be rejected based on their age, sex, race, sexual orientation or religion.

Condo:  Buying a condo unit is similar to buying a single-family house in which you don’t need to be screened to be accepted. You are dealing directly with the individual owner of the unit for sale. You make an offer and once accepted transfer the real estate between yourselves.

Financing

Co-op:  Since you’re not purchasing actual property but purchasing stock in a co-op, your financing options are more limited because not all banks want to provide a mortgage for stock vs. real property. FHA (Federal Housing Administration – government backed mortgages), for example, does not lend in co-op buildings, but does for condos.  Interest rates for co-ops also tend to be slightly higher than a condo since the banks see them as more risky.

Condo:  You can finance the purchase of your unit using a traditional mortgage. You’ll make payments directly to the lender. FHA financing is available for condos that meet FHA’s requirements.

Selling & Renting Out

Co-op:  When it’s time to sell your shares, you have less control over the prospective buyer since the co-op board will need to review and approve the buyer.

Usually, co-ops allow fewer renters and all must be approved by the association. There may be several restrictions in the bylaws in the amount of time and reason for the need to rent. Because of this, co-ops tend to have a strong community of owners who know each other and are less investor-friendly than condos.

Condo:  You can sell your unit to any buyer and accept any offer without approval from the association. You’ll reap any gain in equity from your individual unit when selling.

You may not have any or few restrictions for renting out your unit, but first check the association’s bylaws. Some buildings may have a large percentage of renters compared to owners, which isn’t always a good sign. Condo buildings are starting to be stricter, like co-ops, about renting because of building wear and tear and lender requirements for there to be more owners than renters to get the best financing options. 

Buyer Beware Tips

Co-op:  Make sure you are buying into a financially sound property. Do your homework and ask to see board minutes to determine if any major issues have been discussed, review financial statements, and examine the physical upkeep of the actual building. Sub-letting of a shareholder’s leased unit will have similar restrictions and there can be limits on how many shareholders can sublet at a time. Read the cooperative bylaws, rules and restrictions carefully before purchasing.

Condo: You need to ask the same questions as above in order to determine if it will be a wise investment. Remember, you’re not just an owner of your unit, but are responsible for the entire building and community. Check out my blog article, “Review Those Condo Docs” (Click Here) for more details.

Quick Take-Away

There are pros and cons to buying both condos and co-ops and there is no “right” answer to which is better.  It really depends on your personal goals and finances. 

And, just know you don’t have to figure it out alone.  I’ve helped my clients navigate both types of purchase and I can help you too.  Reach out to me and let’s chat more about whether a condo or a co-op is the best first for you when you are ready.