Condo or co-op: Decide what’s best for you

If you’re on the hunt to buy an apartment, one thing is crucial before beginning your search: decide if a condo and cooperative is right for you. “Working with a client, it’s important to immediately define the difference,” says Brian Lewis, an agent with Halstead’s New York office. Because the ownership structures of condos and co-ops are vastly different, all the financial and legal matters of buying one will dramatically differ, too.

Condos are pretty straightforward. In a condominium, your apartment and a percentage of the building’s common areas (known as the “common elements”) belong to you. Though a board is in place to run the building’s condo association and manage the property, the board is fairly hands off when it comes to what you do with your property—renting it out, for instance, or putting it on the market and selling to whomever you’d like.

In a cooperative (aka co-op), the owners collectively own shares (or stock) in a corporation that owns the building. A proprietary lease enables an owner to occupy a particular apartment unit within the building. The co-op owner, also referred to as a shareholder, doesn’t own their particular unit. The co-op’s bylaws and the proprietary lease responsibilities of the owner, as well as obligations and duties of the association.

Co-op boards hold a lot of power, from approving who can buy into the building to restricting shareholder’s abilities to rent out their apartments. All management and financial decisions are made by the board, either through voting or by an elected board of directors that handles day-to-day operations.

Curbed spoke with expert agents in both condo and co-op sales on how to determine which is best for you.

What can you afford?

This, of course, is the question that kicks off every homebuying process. Still, it’s especially important one when considering co-ops vs. condos. You may have your heart set on low maintenance condo ownership, but working with a tight budget could change your mind. “You’ll find there’s a big difference in price [between co-ops and condos],” says Corcoran agent Tara King-Brown, who notes that in New York, there’s as much as a 30-percent premium for condos.

Co-op apartment are more plentiful in New York and typically in less demand than condos. Find a broker who’s familiar with the local apartment market, be honest about your budget, then figure out where you’ll get the most bang for your buck. “Sometimes [agents] can talk people off the condo ledge,” as Lewis puts it.

Both co-op and condo associations will charge monthly fees on top of your mortgage, which vary widely from building to building. Unlike a condo building, the co-op fee typically includes an underlying mortgage and property taxes, in addition to any amenity, maintenance and utility costs. With condos, you pay monthly common charges that cover the upkeep of the “common” aspects of the condo. The more building amenities, the higher the fee.

How long do you want to live there?

In fast-paced urban housing markets, it’s common for homeowners to buy and sell more frequently, rather than fulfill a 30-year mortgage. But buying into a coop isn’t ideal for short-term ownership. “For people who only think they need a place for a few years, condos just offer an easier process to sell quickly or sublet your apartment,” says Nick Gavin, an agent with Compass.

Co-op ownership is more suited for long-term ownership; consider it an investment in the building and the community of shareholders. “It’s more intimate and there’s less turnover,” says King-Brown. “Co-ops are great for buyers who want to plant roots.”

What type of property do you need?

If you’re looking for an investment property, pied-à-terre, or just an apartment you can occasionally rent out while you’re away—consider cooperatives mostly off limits. Many co-op boards won’t approve shareholders that are only looking for a part-time apartment. And if you’re accepted as a shareholder, you’ll likely be prohibited from renting it out when you’re not there. Some boards might work with owners on rental agreements, but ultimately, you’ll need their approval before anybody else lives in the apartment. Buying a condo does not come with those ownership restrictions.

How quickly do you need to buy it?

Condos often offer a quicker sales and quicker selling process. “For co-ops, you really need a timeline in place,” says Gavin. Buying a co-op requires a lengthy application process, and selling your co-op will require the approval of your board for any new buyer.

How much are you willing to disclose?

“When you buy a co-op, [the board] is gonna see everything,” Lewis says. “They’re gonna put you under a bright, white light and it’ll feel like a mole check at a dermatologist standing there naked, praying for good news.” On top of the financial disclosures and references—which a condo board will also require—the co-op process is much more invasive. This is because as a shareholder, your finances affect the whole building.

A few financial question the boards will want to know include your ability to fulfill a required down payment, how much money you’ll have after you close the sale, and your debt to income ratio. On top of financial disclosures, expect at least one in-person interview where you’ll have to talk about your family, your pets, other homes you own, planned renovations, and more.

Legally, there are only two legal grounds for a co-op board to reject a hopeful would-be shareholder: financial criteria and an unwillingness to abide by the terms of the association’s rules and regulations. But expect the process to be unpredictable and disappointing at times. “They’re like gatekeepers of the building,” says King-Brown. “Co-op boards can go any which way in making these decisions.” On the other hand, “once you’re in contract for a condo, most condo deals will close,” she says.

Is the co-op the right type for you?

You must also consider the type and size of the co-operative. A self-managed co-op will likely require all shareholders to be more hands-on with the building maintenance (you might even be asked to shovel snow or take out the trash). Co-ops can also vary in size from just a few units to hundreds of apartments. The smaller the co-op, the more likely it is that you’ll have to be actively involved in the building’s management. In a small co-op, you’re also more vulnerable to unexpected costs and you are tied more closely to other shareholders’ finances. For example, financing an elevator replacement in six-story co-op will cost individual shareholders double in a 10-unit building than in a 20-unit building because the costs are only divided 10 ways instead of 20. Likewise, if a shareholder falls into arrears on his maintenance or mortgage in a small co-op, it may make it impossible for any other units to be sold until the issue is resolved because banks will not lend to prospective buyers with more than 20% of the building in arrears