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Curbed University: Co-op or Condo?

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We’re going to spend the next couple of days breaking down the inventory in the New York housing market. First up, the eternal burning question: co-op or condo?

The abundance of co-ops is one of the oddities of New York City real estate. They’re everywhere?over 300,000 units in total, or more than four times the number of condos. No other city comes close to that sort of co-op dominance. And while most new developments are condos, the co-op stock is unlikely to disappear anytime soon. That means you should know the difference, and not just to pick up that looker at the end of the bar (bad idea, trust us).

Here’s the essential nugget: When you buy a condo, you’re buying real property. Once the deal is done, you own your apartment and an undivided portion of the common areas in the building. It’s like buying a house in the ‘burbs, except your neighbors live on top of you and you don’t have to buy a lawnmower.When you buy a co-op, you’re buying shares in the corporation that owns the building. And those shares entitle you to a proprietary long-term lease (usually 99 years) in your apartment.

As for the practical effect, it basically boils down to money and humiliation. Or, in paragraph form:

1) What It’s Going to Cost You
Price: On average, condos are more expensive?about 50% more expensive in aggregate (or 10% more on a per square foot basis), according to the latest Miller Samuel figs. There are a couple of reasons for this: first, as noted above, almost all new developments are condos, and that enormous Viking stove and shiny bamboo floor ain’t free. Second, co-ops can be a pain in the ass. There’s that whole shares-in-a-corporation bit, which is complicated and unappealing to some buyers; there’s the nagging risk of default (or increased fees) due to a delinquent neighbor who can’t cover their portion of the mortgage; and, finally, the application process can be a bear. All of this adds up to an inherent co-op discount.

Downpayments & Mortgages: The flip side of the price coin is that co-ops may require more up front in order to keep away financially risky buyers. Remember, you’re all teaming up to pay the building’s mortgage, and nobody wants Johnny Occasional-Freelancer on their team. These downpayment requirements can range from 20% to 100% (metal briefcase optional). Obtaining a mortgage on the apartment can also be tricky for co-op buyers. Why? Because they’re just buying those shares in a corporation, they can’t secure their mortgages with real property. In some cases, a co-op will only work with a pre-defined set of approved lenders. Take ‘em or leave ‘em.

2) Getting in the Door
A co-op is like a Manhattan pre-school. If you think you and Junior are going to waltz in without a thorough vetting, you’re kidding yourself. Each co-op has a board of directors, which is charged with, among other things, deciding who makes the grade. We’re going to cover this process in greater detail in a later lesson (hello, board packages!), but suffice to say that if you’re approved to move into a co-op, you’ve likely already bared all of your financial assets to a group of strangers and answered humiliating questions about your career failures. There is a good reason for most of this – co-op owners need to know that everyone can cover her share of the building mortgage. And there’s a built-in exclusivity to some co-ops that can only arise from thorough, nightmare-inducing interrogation. Still, it’s probably going to hurt a little on the way in.

3) Once You’re In
Monthly Fees: In a condo, you’ll pay monthly common charges to cover the cost of the building’s heat, hot water, insurance, staff salaries, and the like. In a co-op you’ll pay all of that (in this case, it’s called maintenance), plus a portion of the building’s mortgage and taxes. Fortunately, the amount that covers the mortgage interest and taxes is tax deductible.

Building Policies: In addition to gatekeeper duties, co-op boards set building policies. It probably goes without saying that you should know what these policies are before taking the plunge. Some will help you filter your search from the get-go. Got a yapping Chihuahua? You’ll probably know where he’s wanted before you step in the door. But some of these policies might not affect you until you’ve already unpacked your bags. Need to rent the place for a year while you’re doing business in Beijing? Too bad, if the board has a no subletting policy. Condo owners, who aren’t subject to an overriding lease, are generally free to do as they please, as long as the Chihuahua doesn’t shit in the gym.

4) Getting Out
Flip tax: Some co-ops impose a penalty on the sales of units in order to encourage continuity in the building community. Plus, free money!

Other selling costs: The rest of the costs associated with selling an apartment?state and local taxes, title costs, and appraisal fees?can be less for co-op owners, because (you getting this yet?) they’re not selling real property. Plus, because co-op sales are not recorded, they can be more private, a lure for people who are famous and/or shy.

Death and devisees: Okay, we’re pushing our luck here, but here’s a fun one to end on. When you die, you can pass your condo to pretty much anyone you want–your wife, your uncle Jimmy, your hairdresser. It’s your property, you can dispose of it as you wish. But co-ops are trickier for all of the reasons we’ve discussed (you just hold a lease, the board is all powerful, etc.). A transfer to your wife will probably be okay, but other devisees or heirs may have to go through the board approval process (or worse, deal with securities regulations). The good news is you’ll be dead, so you’ll never have to subject yourself to that again.

That’s it for today. Corrections, amplifications, and other ruminations are encouraged in the comments. Back tomorrow with some thoughts on another New York question: prewar or not?
· Curbed University [Curbed]