What's the Difference between a Condo and a Co-op?
Written by Brian Enright
Co-operatives and condominiums are two legal designations for real estate that offer different rights to homeowners. “Condos” and “co-ops” vary most significantly in their ownership structure: while in a condo, residents own the individual units, people who live in co-ops are shareholders of the corporation that owns the building and in turn get a “proprietary lease” which allows them to inhabit a specific space. Further differences include pricing, intrusiveness of the application process, and authority of the board of directors. Condos and Co-ops are also formed under and governed by different laws. In New York City they are governed by the New York Condo Act and the Business Corporations Law. Condominiums and co-operatives are found across the country but the highest concentration of co-ops can be found in New York City. Because of that I will focus on those specifically in New York. It should be noted too that although there are many distinctions between condos and co-ops, due to shifting consumer demands and changes in regulation, these distinctions are becoming less rigid.
What is a Condominium?
Condos come in many forms, from apartment buildings and multi-family complexes to townhouses. In terms of ownership, they are like traditional houses; condos are real property, with a deed that can be transferred from person to person. When someone purchases a condo, they also own an interest in the common areas of the building. Condo owners are required to pay fees or common charges which fund the general upkeep of the building, the salaries of building employees and other expenses.
How is a Co-op Different?
A variety of property types including apartment buildings, townhouses and multi-family complexes can be classified as co-ops. Co-ops differ from condos first and foremost in their ownership structure. Where a condo would sell individual units, a co-op would sell shares of the corporation that owns the development. When buying a co-op the down payment is usually at least 20% and some co-ops don't allow financing, meaning potential buyers have to pay for their shares in cash. Co-op residents pay monthly maintenance fees that include the underlying real estate taxes on the property. Co-op fees also may go towards paying the underlying mortgage on the building. Because of this, it may appear that co-ops have higher monthly fees than condos.
Management styles are another way that co-ops differ from condos. Condos are managed by the board of managers, which is elected by residents of the building to oversee the upkeep and major projects in the common areas. A condo board typically cannot reject buyers, but it has the right of first refusal, meaning it can prevent the sale by purchasing the apartment at the same negotiated price (although this right is rarely exercised). Co-operatives are managed by co-op boards, elected by the shareholders of the building, which have substantially more power than condominium associations. Most significantly, co-op boards manage the intensive process of vetting (and often rejecting) any candidates who want to buy into the co-op. The vetting process varies from development to development, but many require interviews, tax returns, and several years of financial documents. Although intrusive, this scrutiny ensures the financial stability of a co-op and members are assured of their neighbor’s trustworthiness. Co-ops boards are, by law, forbidden to reject potential buyers on the basis of race, gender, religion, age, or sexual orientation. There are only two valid reasons to reject an applicant: either the applicant cannot afford to live in the co-op or they appear to not be able to adhere to the co-op rules. However, this criterion can be, and is, applied liberally.
Condos rarely require interviews or substantial financial documentation from potential buyers, although in recent years, some have become more rigorous in their requirements. The New York Times Article “Condos Tighten the Rules" (May 2007), gives examples of certain condominiums in Manhattan asking for several years of tax returns and reference letters. However, the same article states that the general impression of condos is that “anything goes” in regards to buyers.
Condominiums and co-operatives offer different options of home ownership that come with different rights and responsibilities. In a condo, value lies in the property itself. In a co-op, the value lies in the ownership of shares in the corporation that owns the building. These designations each have their own merits and disadvantages.