Co-ops and condos: The pros and cons of each

More than 74 million Americans live in community associations, according to the Foundation for Community Association Research, with a total of about 358,000 associations nationwide. Two of the most common types are condo associations and housing cooperatives, or co-ops. The main difference between the two lies in their ownership structures.

Condo vs. co-op: What’s the difference?

Both condos and co-ops are similar in that residents live in separate units with shared common areas, such as a pool, recreation center or playground. However, each has a different method of ownership.

When you buy a condo, you own the unit itself and a percentage of the common areas. When you buy a co-op, though, you’re actually purchasing a share of the overall property, and your share gives you the right to live in your designated unit. Think of co-ops the same way you might think about investing in the stock market: You’re a shareholder, so you have certain rights and a say in how the co-op is run.

Here are some other primary differences between a condo and a co-op:

1. Price

A co-op is often cheaper than a condo, according to the National Association of Housing Cooperatives (NAHC). However, the down payment for a co-op can be high. While condo owners can take advantage of lower–down payment mortgages, such as a 3 percent conventional loan, most co-ops require a down payment of at least 10 to 20 percent, according to the NAHC. In some cases, that requirement can be significantly higher, too. In Manhattan, for example, it’s not uncommon to see a 50 percent down payment requirement for co-ops.

There’s another trade-off, though: Closing costs for a co-op are likely to be lower than the final expenses on a condo, as you won’t need to pay for some fees, like title insurance.

If you have plenty of upfront cash to buy a home, the lower price of a co-op can be appealing. If you’re in need of a mortgage, though, a condo might be a better move. Mortgage lenders are typically more likely to issue loans for a condo than a co-op. That’s because if a borrower defaults on a condo loan, the lender has real property to deal with rather than shares, which can be harder to sell.

2. Fees

Co-op fees tend to be higher than condo fees because co-ops roll all the monthly expenses into one bill (often called the “maintenance”), including gas, water and property tax.

For example, if a co-op shareholder owns 2 percent of the property, they will pay 2 percent of the electric bill. For residents who travel a lot or might not use that much electricity each month, this model could be a waste of money. On the other hand, it might be convenient for those who prefer the simplicity of one monthly bill. Condo owners pay their utilities and tax bills on their own, so those costs are not reflected in the monthly fees.

“When [co-op] buyers see these enormous fees, they put on the brakes and say, ‘No way on the planet am I paying that much money’ — but they will probably spend that much in a condo,” says Leslie White, a Redfin agent in the Washington, D.C. area. “My advice is to break down the costs and do a side-by-side comparison to get an accurate picture of what you will pay each month.”

Condos have fees, too. You’ll pay homeowners association fees for being part of a condo association, and the cost can vary dramatically depending on what is offered in the way of amenities and services. For example, if your condo is in a high-rise building with a gym and a doorman, your HOA fees might be higher than if you owned a small walk-up with limited amenities.

When it comes to property taxes, a condo owner pays tax on the unit’s assessed value, while a co-op shareholder pays a portion of taxes on the entire property. So, if the shareholder has a 10 percent stake, they are responsible for 10 percent of the overall property tax bill.

3. Governance

Condos and co-ops operate similarly in terms of how the shared spaces are maintained. Condos have condo associations, and co-ops have a board of directors whose members can vote on changes or additions to existing rules and policies.

Both typically have rules about how you can alter your space. For instance, a co-op or condo owner can paint the interior of their unit any color they wish, but they might not be able to paint the exterior.

The most important difference between their governing bodies is in their vetting processes for new residents. With a condo, as with a single-family home, if you have the money you can buy the unit. Co-ops are notoriously more stringent in who’s allowed to buy, often requiring background checks, referrals and other personal information. (This is a security measure — as a shareholder, you’re partially responsible for the well-being and financial health of the entire building.)

4. Renting or selling

If you’re weighing the pros and cons of a co-op, you can put the ease of selling or renting it to a tenant in the “con” category. A co-op board can turn down a buyer based on any number of reasons, even if they have the cash to pay for it. If a board wants to wait for a higher offer so that the perceived value of the building isn’t diminished, for example, then the shareholder is at their mercy.

Condo owners can often sublet their units, although some associations have restrictions on the percentage of condos that can be rented at any given time. Renting is typically not allowed at all in co-ops. Furthermore, it’s usually easier to sell a condo, because it does not have the same extensive interview process.

5. Amenities

The fees you pay to be part of either a condo or co-op community can give you access to available amenities such as a pool, rooftop deck or gym. Condo communities typically offer more amenities, but co-ops can offer similar perks, too. If a clubhouse, tennis court or other shared offerings are important to you, be sure to consider these when deciding between a condo or a co-op.

6. Availability

You can find condos for sale in every major city in the U.S., but these units are also becoming more widely available in smaller towns. Co-ops, on the other hand, are much less common in many parts of the country.

The majority of co-ops were formed before the mid-1970s and can be found in large metro areas like New York City, Philadelphia, Chicago and Seattle, according to the NAHC. If you’re looking to live somewhere less urban, chances are you’ll struggle to find co-op options.

Affordability compared

When comparing the affordability of condos and co-ops versus freestanding homes versus renting, there are multiple factors to take into account. For home purchases, the price tag is the first thing to consider: Single-family homes tend to be the most expensive of the bunch, while condos and co-ops tend to be cheaper, with condos more expensive (but less restrictive) than co-ops.

One of the biggest upsides of owning a home — whether it’s a condo, co-op or freestanding house — is that you’re building equity over time. As a renter, you’re still paying every month, but you get no equity in return. In addition, as a homeowner you enjoy the stability of a fixed monthly payment (assuming you choose a fixed-rate loan). Renters, meanwhile, face the ongoing uncertainty of rent increases each time a lease is up.

However, homeownership brings additional costs beyond your monthly mortgage payment. There are property taxes and maintenance costs to consider, and you’ll also need to pay HOA dues if your home is part of a homeowners association. And of course, you’ll need to come up with a down payment upfront, which can be prohibitive for many people — and is not an issue for renters.

Next steps

Given the pros and cons of both condos and co-ops, the first step in figuring out which one is more viable for you is to consider how long you plan on living in the unit. Since co-ops are cheaper upfront, long-term residents might end up saving quite a bit of cash compared to buying a condo.

Another potential benefit? Co-ops essentially allow you to handpick your neighbors. The grueling interview process gives you a closer look at who you’ll be bumping into in the common areas.

In contrast, owning a condo might help you diversify your investment portfolio. While condo bylaws might limit the number of renters in a community, condo owners have the option of subletting their unit, and generally an easier time selling.

As you weigh your options, be sure to understand the association or board rules. You want to be sure you’re not signing up for rules that might impede your lifestyle or goals. White also recommends asking the board or association if there are any current issues being worked out or upcoming changes that will affect residents, as this can help inform your decision.

FAQs

• Do co-ops or condos have more fees?

  Co-ops tend to have higher fees than condos — mainly because they often roll all monthly expenses and utilities, including gas, electricity, water and property tax, into one monthly bill. Condos do charge fees too, though, and if your building or complex has luxury amenities like a pool or fitness center, your condo association fees may be high as well.
  

• Are taxes treated differently with co-ops?

  Both condos and co-ops involve property taxes — however, the way they are paid is different. Condo owners pay property taxes on the unit’s assessed value, the same as the owner of a freestanding home would. By comparison, co-op owners pay a portion of the taxes on the entire property. For example, if you have a 10 percent stake in the cooperative, you’ll pay 10 percent of the overall bill.
  

• Are co-ops or condos more expensive?

  The sticker price of a co-op is usually lower than that of a condo. However, most co-ops require higher down payments, boosting your upfront costs.