Co-op vs Condo: What's the Difference?

The PropertyClub Team
Sep 15th 2020
If you plan on living in a major metropolis like New York City you might be wondering what the difference is between a co-op and a condo? Here's what you need to know so you can decide which is best for you.

If you’re planning to purchase an apartment in a large city like NYC, you might be wondering what type of property you should buy, a condo or a co-op. Before you can decide, you’ll need to understand the vast differences between condos and co-ops. These differences range from ownership structure, pricing, purchase requirement, and building governance to how apartments in each building type are taxed.

In New York City, about 75% of Manhattan’s housing stock consists of cooperative buildings, colloquially known as co-ops. However, they have recently fallen out of favor amongst developers. Today, most new construction buildings are condos, which command a higher price per square foot. Many buyers prefer condos as they do not have to go through the tedious and often contentious co-op board interview and approval process. Co-ops tend to be more strict when vetting potential buyers and typically ask for at least 20-30% down up front. Condos typically require a much lower down payment of around 10%. Co-op boards also dictate to whom, how, and when you can rent out the home, need to approve renovations you make, and can even reject a buyer with no explanation. 

An intro to Co-ops 

Co-ops are different from condos and single-family homes. When you purchase a co-op apartment, you are not buying real property. Instead, you are buying shares in the cooperative corporation, and therefore becoming a shareholder. These shares entitle you to a long-term proprietary lease, to be provided by the corporation, which will make you a tenant in the co-op building. Generally, the larger the apartment, the more shares you will own in the co-op. 

As a shareholder, you’ll be required to pay a monthly maintenance fee to the cooperative corporation. This fee will cover building expenses such as heat, hot water, building insurance, salaries for building staff, real estate taxes, and the building’s mortgage. 

An Intro To Condos

Condos are considered real property, meaning that condo buyers will receive a deed, and virtually anyone can purchase a condo. While it’s true that most New York City condo buildings have a board and require an application, it’s more of a formality than anything. A condo board cannot reject a buyer the way a co-op board can unless they wish to exercise a right of first refusal and purchase the apartment themselves.

 There are also fewer restrictions when it comes to subletting or renting out your condo apartment. You will, however, still have to pay monthly maintenance fees. Typically they will be lower than maintenance fees in a co-op as they will not include property taxes, but nowadays plenty of condos offer so many high-end amenities and facilities that the monthly maintenance may feel like an additional rent bill. 

Differences Between Condo and Co-op Ownership Structure 

Unlike condos, co-ops are shareholder-owned corporations. Buyers are purchasing shares in that corporation when they buy an apartment in a co-op. They are not, technically, buying real property. Instead of getting a deed to their property, they get shares. However, owners have a title to their shares, which can create some confusion for buyers who are unsure of the differences between title vs deed

Like any corporation, a co-op is overseen by a board of directors who, in theory, look out for the shareholders’ interests. The shares in a co-op entitle a shareholder to a proprietary lease, essentially making them a permanent tenant. Finally, there tends to be a lot more “rules” in a co-op vs. a condo.

A condo buyer is buying “property” that has a deed attached to it, just like what would occur if one was buying a ranch style house on Long Island. Condos have an association to manage the building’s operations, but their power to institute rules is much less than is the case with a co-op board.

Because the condo is a straight forward purchase, with a deed, taxes are applied to that individual unit. With a co-op, on the other hand, property taxes are charged to the corporation. Individual shareholders pay their share of those taxes based on the number of shares they own. This number usually reflects the apartment’s market value. For example, an apartment on the ground floor with one bedroom will have fewer shares than a unit with two bedrooms on the twenty-third floor.

Co-op vs Condo Board Approval: The Good and the Bad

The dreaded co-op board approval meeting and interview is often an unpleasant affair. Ask anyone who has gone through one, and they will tell you, in all likelihood, the process was like an intense job interview. The difference is that unlike in a job interview, it was not in front of one person, but the entire board of directors of the co-op. 

Unlike condos, co-ops almost always require an in-person meeting with the building’s board of directors. Before this meeting, mountains of personal character references and financial documents about the potential buyer are given to each board member. These documents contain the buyer’s credit rating, funds in the bank, mortgage approval, and just about anything else relating to the buyer’s financial status. 

After the board has picked apart these documents, the buyer is called in for a personal interview. While most board interviews aren’t quite like Gestapo interrogations, some are. And there is often one tyrant or want-to-be prosecutor among the group who will rip into the candidate for the mere pleasure of it.

The big advantage co-ops have, which condos don’t, is that residents of a co-op can pick the type of people they want as neighbors. Furthermore, a co-op doesn’t have to give a reason why someone was rejected. If they didn’t like the shine on their shoes, that’s enough to get black-balled.

Co-op vs Condo Maintenance and Fees

Condos, like co-ops, levy monthly maintenance charges to cover a building’s operating expenses. Condos usually have lower monthly maintenance fees because there is not an underlying mortgage for the building, which is often the case with co-ops.

Differences Financing and Buying a Co-op vs Condo

Getting a mortgage in NYC for a co-op is pretty straightforward, assuming you work with a lender that has experience with co-ops. Outside the city, it’s a different matter entirely. Buyers have an easier time securing financing in a condo, and the interest rates tend to be slightly lower. Lenders prefer loaning money to condo buyers because, in the event of foreclosure, it’s easier for them to take back the property.

Just trying to find a bank or mortgage company to underwrite a mortgage for a co-op outside New York City – where there are few – can be difficult. Because there are so few co-op buildings outside the city, banks can’t find “comps” – similar unit sales - and therefore don’t know how to price the unit. If they can’t determine this, they don’t write the loan.

Co-op vs Condo Down Payments, Subletting, and Flip taxes

Condo buyers can finance up to 90% of their purchase. On the other hand, most co-ops require that a buyer put down a larger down payment, typically at least 20% of the purchase price, with some requiring down payments that are even higher. The reason for this is co-op boards want to make sure the new buyer is financially able to pay monthly maintenance fees in the event of a job loss. Some co-ops require a high down payment because the owners only want neighbors who are as financially stable as they are. 

Another thing to keep in mind is that co-op buildings will generally charge a flip tax when you sell the property. HDFC buildings may have exceptionally high flip taxes. 

Co-op vs Condo Market Value: All Square Footage Is Not the Same

On a square footage (sq. ft.) basis, condos are worth more than co-ops. How much more is debatable. Nevertheless, they are more valuable due, in part, to the fact that they tend to be newer, larger, and don’t have to contend with the hassle factor of co-op board approvals.

Condos also tend to be in luxurious new up-market developments that command a higher price per square foot. And because condos are less common and in higher demand in New York City, they tend to get a higher price. Finally, the fact that it is easier for foreigners and investors to purchase a condo as well as to ease of subletting a condo compared to a co-op contributes to its ability to get a premium price.

While you may have seen reports that the average NYC condo is 50% more expensive than the average co-op, you should keep in mind that those aren’t fair comparisons. The average condo is newer and larger than the average co-op, so it’s more of an apples to oranges comparison. When it comes to comparing apples to apples, or a condo and co-op with similar attributes, size, and age, the condo’s price is only about 10% higher on a square footage basis than a co-op. 

Is a Co-op or Condo right for you?

When considering buying a co-op or condo, it really depends upon your ultimate goal. Do you plan to use the home as a primary residence, a pied-a-terre, or investment property? When buying a co-op, the lower prices reflect the ‘endurance’ it takes to purchase and rigorous qualification requirements. In contrast, condos are typically more expensive - but you are paying for the ‘flexibility’ and ease of ownership. 

With all their differences in price, financing, management, and desirability, condos and co-ops have much in common. Together, they constitute a majority of the housing stock in New York City. And you’d be hard-pressed, standing on a sidewalk, looking up at a residential building, to determine if it’s a condo or co-op.