Housing stock, meaning the type of housing available, varies across the country. In some markets, including large cities such as New York, Boston and San Francisco, cooperatives, or co-ops, are popular housing options. Condominiums, or condos, are also a very common housing option, particularly in urban or suburban areas. Although some of the basics of home buying hold regardless of the type of home you’re looking to purchase, there are a few things to know before buying a condo or co-op.
The first thing to know is what, exactly, are condos and co-ops? Well, they’re not a type of home, like you might think of when you hear “colonial” or “ranch-style.” Condos and co-ops are really a form of ownership. Let’s take a look at each one separately.When you buy a condominium (condo) you’re purchasing both an individual residence unit and partial ownership of all common areas in the development, such as recreational facilities, community rooms, grounds, etc. Some of the benefits of owning a condo include:
- Not having to worry about home maintenance. When you purchase a condo part of your monthly or annual fees goes to pay for landscaping, litter removal, exterior housing upkeep and repairs. If you’d like to put an end to snow shoveling or lawn mowing, a condo may be for you!
- All the amenities. Many condo developments offer onsite amenities such as a pool, gym, or tennis courts. Frequently condo associations will also host social events for residents.
- Enjoying the financial benefits of homeownership. Unlike renting, when you buy a condo you’re building equity, or savings, in your unit and if you take on a mortgage to finance your condo you can write the mortgage interest off your taxes.
All condo communities have an association. All residents are members of the association. The association collectively votes on rules governing the community, such as parking restrictions, pool privileges, trash removal, pet restrictions, even unit decorations and modifications. A board of directors heads the association; members living in the development are voted to the board by other residents.
When you buy a condo you’re agreeing to abide by the bylaws and restrictions governing the development. You’re also agreeing to pay condo fees. The association uses condo fees to pay for routine maintenance and community improvements. Condo fees are typically monthly fees, but it can vary by development. It is usually a fixed fee for the year with the association included in discussions on any increase at year-end. The association should also keep a reserve fund for unexpected repairs or expenses. Otherwise condo owners can be charged an assessment if expenses arise and the fund is empty.
Financing a condo purchase is similar to obtaining a mortgage on a single-family home, except that your lender may have restrictions on types of condos approved for FHA financing. The lender may also charge a slightly higher interest rate depending on the owner-occupancy rate of the development. That’s because lenders want to be assured that the development is financially sound. The higher the investor-owner rate, or the number of buyers who will rent their units out rather than occupy them, the potentially less financially stable the development. Renters are more transient and investor owners may be more likely to default (not pay) their loan than occupant owners.
When you purchase a co-operative, also known as a “co-op,” you’re actually buying a share in a cooperative corporation that owns a building. In turn, the corporation gives you a “proprietary lease” which entitles you to occupy an individual unit in that building. Leases can vary; for as little as 10 or as much as 50 years. Leases can be either automatically renewable or renewed only with the approval of the other co-op shareholders. Co-ops are primarily found in large cities like Boston, New York or San Francisco.
Like condos, co-ops are overseen by a board. To buy a co-op not only do you have to qualify for financing (if you’re not paying cash outright), but also pass an interview and be approved by the co-op board to live there. The board may require references and financial statements as part of the interview and approval process. Regardless of how you feel about having to be “approved” to purchase a co-op there is actually a very practical reason for the process. The co-op board members are also owners in the property. As owners they would be required to pick up the mortgage on your unit in the event that you default on your loan.
Just as with condos, you’ll pay not only for your co-op ownership share, but also a monthly co-op fee to pay for ongoing building maintenance, repairs, and unexpected expenses.
There are a few unique financial aspects to purchasing a co-op. First, if you need to obtain outside financing to purchase a co-op, a lender will review not just your financial situation but also the financial situation of the cooperative. Why? Although it’s not very common, a lender wants to make sure that the co-op is financially stable and not likely to go bankrupt or default on the building’s mortgage. You should be concerned about the co-op’s financial stability as well because in the event that the co-op should default on the building mortgage, you will lose your ownership equity. That means you become a rental tenant and the bank holding the mortgage on the building is now your landlord.
Another difference when purchasing a co-op is that because you’re actually purchasing a share of a company and not real estate, you won’t be able to take a mortgage interest tax deduction. You should consult a tax attorney or accountant to learn what other tax deductions you may qualify for instead.