Condo vs. Co-op

Posted in Buying, Uncategorized on December 11, 2009 at 9:25 am

CONDOS
Buying a condo is like a buying a single-family home that sits inside a building. You own the apartment plus a percentage of the building’s common areas.

Condo buildings have monthly “common charges” to cover building-wide services (management, door staff, plumbing, roofing, common walls) but these charges are usually much smaller than co-op maintenance charges.

Condo buildings have associations but they cannot veto sales or rentals-making condos very attractive to investors.

Condos are usually more expensive than co-ops; there are fewer of them and there’s a high demand. Lending banks are lenient about condo buildings – if you borrow 75% or less of the price of your condo, a lender won’t review the building’s finances, and all banks accept completed condo buildings that are 90% occupied. Since a condo is “real property”, your loan is a mortgage secured by the apartment itself.

Closing costs are higher for condos than for co- ops…typically 2% – 4% of the loan value, as opposed to the flat, approximately $1500 closing cost for a co-op.

Mortgages for condos carry about the same rates as for single-family homes. Your mortgage broker will find you the best rate for your specific needs…and you can lock it in when you apply for your loan.

CO-OPS
When you buy an apartment in a co-op, you’re buying shares in a corporation along with a proprietary lease, allowing you (the “shareholder”) the right to occupy space under specific restrictions. Since you’re not buying actual real estate, co-op loans are not mortgages.

Most co-ops are “stock” corporations with a governing Board of Directors. The co-op gets most of its income from the maintenance fees paid by shareholders that lease their apartments from the co-op.

Lending banks must first approve the co-op before it can approve you for a loan. The financial health of the co-op is as important as the borrower’s. There are also guidelines about the rate of owner-occupancy in the building. However, there are many banks and lenders who finance every type of co-op and every type of borrower.

The co-op has title to (or leases) the building and the transfer or sale of shares in a co-op is not subject to real estate laws. Deeds, mortgage notes, and title insurance do not apply. The co-op usually has an “underlying mortgage” on the entire building and then, you, the individual buyer of the co-op unit, obtain a separate co-op loan to purchase your apartment. The shares and the proprietary lease serve as loan security.

A healthy share of your monthly cost will be the co-op’s maintenance fees-covering your unit’s proportionate cost of building taxes, insurance, underlying mortgage, utilities and routine maintenance.

Most co-op boards must approve buyers and their financing before they can close. The boards can impose limitations on the amount of money you can borrow to buy your apartment. Some co-ops on the East Side require buyers to close with at least 50% cash…most co-ops allow 25% cash or less.

Co-ops are popular because they’re usually the most desirable buildings (many of them have charming pre-war architecture) and the closing costs are low compared to condos and 1-4 family homes. Expect to pay approximately $1500 (excluding lawyer fees and any points you choose to pay) of which the up-front costs are approximately $550, covering application, processing, appraisal and credit check.