December 2020
I know what you’re thinking? Condo? Co-op? What’s the difference? How do I know which is right for me? Worry no more! Here are some key points to help you make an informed choice on which living arrangement is best for you.
Bottom line – what differentiates a condo and a co-op is the legal ownership framework. It’s not that one is more or less desirable than the other – it really comes down to personal preference and your real estate goals.
The Basics
A co-op is setup like a nonprofit corporation. Instead of owning the actual unit, the owner is considered a shareholder and owns shares of the entire co-op building – relative to the size and appeal of the unit. You may think the co-op monthly fees are high until you consider that they include maintenance costs, underlying building mortgage fees, property taxes and utilities.
There are two main types of co-ops: market rate and limited rate. The differences ultimately determine how the sale price is determined. To read more detail on the difference, visit here.
In a condo, residents own their units and share ownership of the building’s common areas managed by the condo association. Essentially, you own and are responsible for the interior of the unit, not the exterior. Owners pays a condo fee to the condo association which in turn maintains lawn and common areas, exercise rooms, pools, roof top decks, building exteriors, balconies, roofs and all shared plumbing and electrical. Some condo associations will include windows or they will provide guidelines and/or preferred contractors for the condo owners to purchase and install their own new windows.
Co-ops fees also cover lawn, garden, interior and exterior maintenance in addition to paying the building mortgage, property taxes and utilities.
Financing
Financing can be a bit trickier for a co-op versus a condo. Common financing options, such as FHA and VA loans, are ineligible for co-op financing. There are also a limited number of conventional lenders who will finance co-op since many co-ops require low loan-to-value (LTV) ratios. As explained by Investopedia.com, “An LTV ratio is the amount of money you need to borrow divided by the total cost of the property. The more of your own money you put down, the lower the LTV ratio.” Remember, co-op units will usually appear to have cheaper purchase prices when compared to similar condo units. But, you’ll need more cash on hand since you’ll most likely be required to come up with a larger down payment when buying a co-op.
The loan process may seem intimidating and full of many details which it is. Too reduce your stress and avoid any issues, it’s important to choose a mortgage lender and title company who are experts in condo and/or coop purchases. Luckily, I can refer you to some trusted professionals.
Approvals
When purchasing a co-op, be prepared to go through an additional level of approval beyond qualifying for a mortgage. It’s common for the co-op board to conduct personal interviews and review your financial situation. Co-op owners are expected to follow more restrictive rules and take part in their building “community”. All decisions, from approval of new owners, to building renovations and maintenance needs are made jointly.
It’s important to note that a co-op board cannot reject you for any of the reasons prohibited by the Fair Housing Act such as race, gender, religion or membership in any other protected class. However, it can reject you for almost anything else – from your outlook on community rules to the practicality of your finances.
On the flip side – in a condo – there is no condo board interview and you decide your level of participation in maintenance and decision making within the condo association.
Policies
Both condos and co-ops have policies about owner-occupancy, limits to renting and sub-letting and restrictions on renovations and pets. For renovations, both boards have a process to review and approve/disapprove renovations plans before construction begins. Why so many rules to follow? One is to protect the owners’ investment as well as protect against any actions that could damage the building or another owner’s unit.
The Future
Before you decide on a condo or a co-op, you should ask yourself about your real estate goals. Do you plan to live in the unit, or will it be an investment property? How long do you plan to live there? Do you plan on renting the unit?
If you plan to live in the unit for a short period of time, you may want to consider the flexibility that comes with selling a condo. However, if you’re looking for a long-term stable investment, where your interests are protected and you have a say in these decisions, a co-op may be just the place for your next home.
Thinking about buying, selling or investing in real estate in the Northern Virginia, Maryland or Washington DC areas? Let’s start the conversation! I will provide a free, no obligation home market analysis and plan designed just for you to optimize your real estate goals! I am available by phone or text at 703-798-1803 or marybeth@magnificentmanors.com.
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What’s the difference between a Condo vs. a Co-op?