Condo Vs. Co-op: Similarities, Differences & Financing
Co-ops and condos are the two housing types that are confused the most often with each other. It’s important to understand both types of properties so you know which option is the best fit for you.
We’ll take a look at some of the differences between co-ops and condos as well as touch upon the application process, market values and financing for each type of housing option.
What Is A Condo?
Put simply, you only own a portion of a condo. Specifically, you agree to own the interior, not the exterior. The exterior of this type of residential property belongs to a condo association. Your condo association handles things like lawn maintenance, maintenance of common areas and any damage to the exterior of your home. You pay condo association fees in exchange for these services. Condo association fees can vary widely depending on where you live, the size of your home and the types of common areas you can access.
Condo associations function like homeowners associations (HOAs). These associations handle maintenance issues and create rules for the community to follow. A condo association can put rules in place such as the types of pets you can have, quiet hours and use of common areas. It’s important to know the rules of the condo association before you move in.
Condos mainly differ from traditional single-family homes because you only own the interior of a condo instead of both the interior and the exterior.
A condo is a great option if you don’t want to spend time and effort maintaining the property. Condos are popular in the outskirts of major cities and are usually less expensive than buying a home, which means they’re a great option for homeowners on a budget.
What Is A Co-Op?
A co-op (sometimes called a “housing cooperative”) is a type of housing owned and operated by a corporation. The corporation owns every part of the home including the interior, exterior and common spaces. You don’t actually buy a piece of property when you buy a co-op. Instead, you buy shares of the corporation that owns the building.
If you buy enough shares of the corporation, you’re entitled to living space within the property. Generally, the more shares you own, the larger living space you’ll be able to get. Co-ops are popular in large cities where the cost of living is high, like New York City.
Who owns the housing corporation? Everyone who buys shares in the co-op owns a percentage of the corporation. Like a publicly traded company, every shareholder gets to vote on issues that affect tenants. Co-ops usually elect a board of volunteers to collect fees and maintain things like common spaces.
Everyone who owns shares in the co-op splits maintenance fees, property taxes and any mortgage on the underlying building. Co-ops usually aren’t run with the intent of making a profit. The co-op might also vote to hire a property management company to handle the day-to-day workings of the building.
One major difference between co-ops and other types of housing is that co-op associations are very picky about who they allow into their community. Before you join a co-op, the co-op board must approve your application. Co-op members want to know that you’ll obey their community rules and that you can pay for any maintenance or tax expenses. The approval process can include personal interviews and a review of your financial documentation. This is different than a traditional home or condo sale where the homeowner will sell to pretty much anyone who can pay the bill.
Condo Vs. Co-Op: What’s The Difference?
Let’s take a look at a few of the specific differences between condos and co-ops.
When you buy a condo, you receive a deed to the home like you would if you bought a single-family home. However, you only own the interior of your property. The condo association owns the exterior of your condo and also handles maintenance and repairs.
When you buy into a co-op, the property belongs to everyone who lives in the co-op. If you own more shares, you own a larger percentage of the corporation. This also usually means you’re entitled to a larger living space within the co-op. Every shareholder splits the costs of maintenance, taxes, repairs and property management fees.
The Application Process
The application process is a unique part of buying a co-op. You may have to take part in personal interviews with board members before you’re able to buy shares in the co-op. The co-op board might also ask to take a look at your financial documents just like a mortgage lender would. You can’t buy into a co-op until you get approval from the board.
Keep in mind that a co-op can’t reject you for any of the reasons forbidden by the Fair Housing Act. This includes race, gender, religion or membership of any other protected class. However, the co-op can reject you for almost anything else ranging from your attitude toward community rules to the viability of your finances.
You usually don’t need to participate in any kind of interview before you buy a condo. Even if your condo association sets strict rules on how you can use your property, it doesn’t control who moves into any unit in the association.
Determining the fair market value of a condo is very similar to determining the market value of a home. The condition of your condo and the values of other residences close to your condo can influence its fair market value. An appraiser can give you an estimate of how much your condo is worth.
There are two main types of co-ops: market rate and limited equity. In a market rate co-op, you can determine your co-op’s value in essentially the same way as a condo or home. An appraiser takes current market conditions into account and determines how much your shares of the co-op are worth. You can sell your co-op for whatever price the market will bear.
In a limited equity co-op, there are limits to how much you can gain in equity from your shares. In some instances, you may also earn $0 in equity due to co-op rules that limit how much you can sell your shares for. These types of co-ops are usually set in place to provide affordable housing below market rates. Make sure you understand the equity rules before you sell a co-op in the future.
Financing Your Condo Or Co-Op Purchase
Like a standard home purchase, you can finance your condo using a government-backed or conventional mortgage loan. However, individual lenders may put limits on the types of condos they’ll finance. For example, you can’t get financing for a condo through Quicken Loans® if:
- You only have the right to use the condo and you don’t own the interior.
- The condo contains a houseboat, segmented ownerships or is a manufactured home.
- The condo project has more than 25% mixed-use or commercial areas.
- The condo has sale restrictions that limit who you can sell the unit to.
- The condo association also operates the condo as a hotel or short-term living space.
Your lender might also want to look at things like communal areas, services provided by the association and condo association finances. These factors affect the value of the property so your mortgage lender may want to see them before they issue you a loan. You’ll likely have a tough time getting a loan if the lender sees that the condo association cannot sustain itself.
A lender will also want to know about the structure of the co-op and the co-op’s board. Most lenders only offer financing to market-rate co-ops because this structure allows them to stabilize their equity.
Your lender will also want to look at financial documents from the co-op to ensure that the corporation can sustain itself. You’ll have a much harder time finding a mortgage loan if there are any limitations on who you can sell your co-op to. Currently, Quicken Loans only offers co-op loans in New York.
Condos and co-ops are two types of housing often confused with one another. You own the interior of the building only when you buy a condo. The exterior of the building belongs to the condo association. The condo association manages maintenance efforts and common spaces. In exchange for services, you pay a monthly fee to the condo association.
Buying a co-op means you buy shares in a housing corporation, not a piece of property. The shares you buy entitle you to a living space and the ability to vote on decisions that affect co-op members. You’ll also need to pass an interview and get approval from the co-op board.
You may have trouble financing a co-op or condo if there are limitations on who you can sell the property to. Individual lenders can set their own standards that co-ops or condos must meet before you can get financing. Lenders want to see that a co-op board or condo association can financially sustain itself before you can get financing for your purchase.
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