The typical first-time buyer seeking to purchase a home in a city will probably consider one of two options: a condominium or a housing cooperative. Although they are similar, condos and co-ops are not the same, and it is essential to understand their differences before buying one.
Susan Isaacs of Slate Properties said many buyers she encounters are minimally informed about condos and even less knowledgeable about co-ops.
“Co-ops are not a housing option that historically are well understood,” she said.
Many people confuse condos with co-ops, thinking they are interchangeable. A condo is a private residence in a multiunit structure that includes ownership of commonly used property. A co-op is also a multiunit building, but that’s where the similarities end. A co-op owner has an interest or share in the entire building and a contract or lease that allows the owner to occupy a unit. While a condo owner owns a unit, a co-op owner does not own the unit.
Co-ops are collectively owned and managed by their residents, who own shares in a nonprofit corporation. The corporation holds the title to the property and grants proprietary leases to residents, Isaacs said. The lease grants permanent rights to residents to live in their units and to use the common elements of the cooperative according to the co-op’s bylaws and regulations.
The first housing cooperatives arrived in New York in the late 1800s, and co-ops remain popular in that city. Thirty percent of all housing there is co-ops, according to the National Association of Housing Cooperatives. Co-ops flourished in Washington starting in the 1920s, particularly along Connecticut Avenue. The first D.C. co-op, the Concord, was introduced in 1891, while it took the first condo 70 more years to arrive on the scene, Isaacs said. Chicago is another city where co-ops are popular.
The difference in costs. Co-ops tend to be cheaper per square foot. They typically offer buyers more control as an individual shareholder and often have lower closing costs.
Condos are often easier to finance. Obtaining a mortgage for a co-op can be tricky. Some lenders shy away from co-ops or require higher down payments.
Condo fees are usually lower. A co-op owner’s monthly fee can include payments for the building’s underlying mortgage and property taxes, amenities, maintenance, utilities and security.
The tax advantages of owning a condo or a co-op are about the same. If the owner has a mortgage, the yearly interest paid on the loan is deductible. Co-op owners also can deduct their share of the mortgage interest paid on the building’s underlying mortgage and their share of property taxes the co-op pays. Property taxes often are lower for co-ops than condos.
Living with the rules. An important distinction between a co-op and a condo is that most co-op associations require a prospective purchaser to be approved by the co-op board. The upside is being able to pick your neighbors. The downside is that when you sell, the board must approve the buyer and that can delay the sale. The board can reject applicants for only two reasons: financial or a refusal to abide by the association’s rules and regulations.
Some people worry that a co-op board has too much power. However, during the financial downturn, co-ops came through better than most condos.
Before the housing bubble burst, most people viewed co-ops as more restrictive, while condos were viewed as “more of a free-for-all,” Isaacs said.
The result, she said, was more condos looked to incorporate rules and restrictions that were previously the exclusive domain of co-ops.
“We’ve seen a number of condo units restrict resales in the first year or two of new ownership, and still others have restrictive leasing structures that have edged over into co-op territory,” Isaacs said.
Can you rent it out? David Howell, a broker and vice president with McEnearney Associates, said, “There’s nothing inherently good or bad about buying one versus the other.”
Howell said that because co-ops tend to have restrictions that limit secondary rentals, residents generally feel more invested in the property, which can foster a strong sense of community among shareholders.
“It is much more challenging for a co-op owner to decide to rent their property,” Howell said. “They typically have to get approval from the co-op board, and sometimes there are stipulations included in ownership documents that prohibit rentals. Buyers really have to understand the restrictions and make the best decision for their situation.”
Your building is your community. Russell Rader, president of the DC Cooperative Housing Coalition, who has lived in the Westmoreland cooperative in Kalorama since 1999, said he was attracted to co-ops precisely because of the community atmosphere they help foster.
“One of the hallmarks of co-ops is that one-for-all, all-for-one philosophy, and that’s definitely been the case with my building,” he said.
Condos and co-ops share several advantages: They are cheaper than buying a house, there’s no yard to mow, and a multiunit building can provide a sense of security and community.
The disadvantages are having to live within proximity of a variety of people, the association’s rules and regulations may feel onerous, and the monthly fees can be high.
Still, people in shared-ownership buildings often watch out for each other’s homes, help each other in times of crisis and develop friendships.
“When I started looking for an apartment I wasn’t initially looking at co-ops. I found it by accident because I liked the Westmoreland and it had a great location and was a historic and classic building,” Rader said. “I don’t think there’s a particular buyer that’s a better fit for a condo or co-op. Anyone who’s looking for a good community to move into is a right fit for a co-op.”