New York City has a plethora of co-ops and condos. There are distinct differences between the two. It is not discussed often, but with the different ownership structures, there is a vast disparity between the closing costs for a co-op and condo. Purchasers should prepare to pay a markedly higher amount for condos.
Condos most closely align with what one thinks about home ownership. That is, owning real property. Co-ops are more akin to owning shares in a corporation. We provide a breakdown in order for buyers to better understand where the difference lies.
Mortgage recording tax
This is typically a condo buyers largest closing cost. The state and city both impose a charge on both new and refinanced mortgages, with the percentage increasing with the mortgage balance.
The tax rate ranges from 2.05% for mortgage balances less than $500,000 and increases to 2.175% for loan amounts greater than this amount. The tax rises to 2.8% for mortgages greater than $500,000 on certain properties, but this does not apply to condos.
With the city’s $945,000 median condo selling price ($1.6 million in Manhattan) based on the Real Estate Board on New York’s (REBNY) third quarter report, the recording tax comes out to quite a bit of money due at closing. For instance, assuming the $945,000 price and a 20% down payment, buyers owe more than $16,000.
Co-op buyers do not have to pay this tax since they are not buying real property. Rather, you purchase shares in a corporation and receive a proprietary lease that allows you to live in the unit.
Lenders require condo buyers to buy title insurance in order to provide protection against future claims that arise from title disputes. The insurance company bases the premium amount as a percentage of the purchase price.
Aside from lender’s title insurance, an owner can also purchase title insurance. The former’s premium declines as the mortgage balance decrease while the owner’s policy protects you for the full purchase price or, if you choose, the property’s market value.
However, lenders do not require co-ops owners to buy title insurance.
Real estate taxes
While only condo owners bear responsibility for mortgage taxes and title insurance, both pay real estate taxes. If you choose to pay the tax on your own, you do not have to set up an escrow account. This means you have to budget accordingly. However, if you roll it into your mortgage payment, the lender is going to require you to put a certain amount aside at the time of your closing. This means you have to come up with potentially several months’ worth of taxes.
A co-op’s taxes are based on the number of shares you own. Hence, you pay this with your monthly maintenance fee.
It is a minor amount, but mortgage and deed recording fees are generally lower for co-ops. Co-op buyers are likely to save a couple of hundred dollars, but you are likely to spend any savings you realize on higher board fees.