Condos and Co-ops: Understanding the Differences and Deciding Which Is Right for You

When it’s time to buy a home, some borrowers choose a freestanding house, but others opt for an apartment. Buying a home within a larger building or complex is similar to buying a single-family house, but there are some differences. There are two broad types of apartment units: Condos (short for condominiums) and Co-ops (short for housing cooperatives). Here’s FSB Mortgage’s guidance on deciding which type will best fit your needs.

Condos

Of the two apartment types, buying a condo is more similar to buying a house. Like a house, a condo is a piece of real estate that the buyer is purchasing. A co-op, by contrast, is not technically real estate. Co-op buyers aren’t actually buying ownership of their apartment. Instead, they are purchasing shares in a corporation that owns the entire building their apartment is in. Their investment buys them the right to live in the building in the form of a proprietary lease.

Condo owners, however, do own their properties — just not all of it. Specifically, they own the interior space of their unit, but not the whole building or its common areas. Everything else, including the exterior of the building, is owned by a condo association, which functions similarly to a Homeowners Association (HOA) in that it is responsible for maintaining all communal areas. Issues like exterior landscaping, routine inspections and repairs, clean and safe common areas, and regulatory compliance for the building as a whole all fall to the condo association.

Condo owners don’t directly assist in those functions but instead pay monthly maintenance fees often called ‘common charges’ which the condo association collects and uses to pay contractors. Common charges for condos vary a great deal. Buildings with extensive amenities like gyms, spas, gardens, offices or coworking spaces, pools, roof decks, game rooms, and the like will necessarily have more substantial common charges than condos with more barebones communal resources.

Additionally, condo associations, which are comprised of members elected from the pool of condo unit owners, create and enforce bylaws for their building to follow. Bylaws cover things like whether pets are allowed (and what type), when quiet hours are, and acceptable uses for common areas. Condos rarely have as many or as strictly enforced rules as co-ops, but some do, and hence it’s important for prospective condo buyers to discuss all the bylaws they will be subject to up front.

Who Are Condos Right for?

• Buyers that want to own the interior of their apartment
• Owners that may potentially want to rent out their unit
• Buyers that want to potentially spend less than they would for a freestanding, single-family home

Co-ops

Unlike houses and condos, co-ops aren’t traditional real estate investments. Co-op buildings are owned, including all interior spaces in the individual apartments, by corporations. Co-ops are especially popular in large cities and other places with a high cost of living because they are typically less expensive than condos. Every tenant of a co-op has to be given permission by the corporation’s board, called the co-op board, to purchase shares in the co-op. Generally, the more shares a tenant owns, the more living space they will be entitled to in the building.

Like most other corporations, all the shareholders have voting rights in regard to issues facing the building and the company. Notably, they have voting power based on the amount of shares they own to elect the co-op board. All shareholders split the maintenance fees, property taxes, and mortgage costs associated with their building.

One potential downside (or upside, depending on the buyer’s perspective) is that co-op boards can be very particular about who they invite to join their cooperative. Unlike in the sale of a freestanding home or a unit in a condominium — where sellers are almost solely concerned with whether interested parties are financially able to make the purchase —  buying an apartment in a cooperatively owned building can often come down to whether the co-op board thinks the prospective buyer will be a good fit in their community.

They can deny just about anyone from purchasing in the co-op for just about any reason, so long as it doesn’t conflict with Fair Housing laws. For example, they cannot deny ownership to someone based on their race, gender, religion, or membership in any protected class.

Who Are Co-ops Right For?

• Apartment dwellers that want to spend less than a condo would cost
• People that don’t intend to rent out their apartment
• Buyers that want a board that governs who can live in the building

Difference in Financing Condos and Co-ops

Appraising a condo for financing purposes is not highly dissimilar to the process for single-family homes. Appraisers look at the condition of the building, its location, and the value of similar properties nearby. For co-ops, the process can be more involved. 

There are two common types of housing co-ops: Market Rate and Limited Equity. 

Market rate co-ops are appraised similarly to condos and owners can sell their shares at market rates (to board-approved buyers). Limited equity co-ops are designed to increase the stock of affordable housing in a market, and consequently shareholders have restrictions on how much equity they can earn from their shares to prevent prices from increasing too drastically.

Securing a loan for a traditional condo or market rate co-op is much easier than for a limited equity co-op. The same is true for condos and co-ops with other major restrictions on their liquidity and value, such as if a substantial portion of the building is used for a purpose other than housing (e.g. commercial real estate). Other restrictions that may give lenders pause include onerous bylaws passed by the building’s board that limit when, how, and to whom the unit can be sold to; or if the owner occupant doesn’t have ownership rights to the interior of their unit.

Additionally, lenders may want to scrutinize the building’s board and its practices and solvency. When buying a single-family home, lenders are only looking at the borrower’s finances. But, the process of securing financing for a condo is more involved. Lenders will also consider the condo association’s finances and if they appear to be mismanaged, a lender might refuse to loan to the prospective buyer.

Ultimately, both condos and co-ops have their pros and cons and whether they are the right fit for a prospective buyer will come down to availability in the market they are interested in and their own financial needs and expectations.

FSB Mortgage is a nationwide, bank-backed lender offering a broad range of loan products to retail customers. Get in touch today to learn about our flexible lending products, fast turn times, and exceptional customer support.