In Manhattan, there are two primary real estate options. Before buying a property, you’ll want to fully understand these two options and what each has to offer. Most of what you will find for sale in Manhattan are co-ops or condos. The most important distinction between these two types of real estate is that with a co-op you do not own the property, a corporation does. You own shares in the corporation, much like you would in a business venture.
Since you’re buying shares in the co-op, you do not own your apartment; you own a part of the corporation that owns the building. The Board of Directors for the corporation sets the value for each apartment based on some shares. The larger and better the real estate, the higher the number of shares the co-op will be worth.
The Board of Directors runs each co-operative building, paying for its mortgage, taxes, and upkeep. The money you spend on your shares covers these expenses and contributes to the building’s reserve funds. To keep a co-op financially healthy, the Board of Directors needs to ensure that each owner can pay for his/her obligations. For that reason, the Board must approve each new member.
Condominiums make up the other available real estate choice in New York. They are a more traditional choice for that buyers actually, purchase the real estate itself. That means that the expectations and responsibilities are different than a co-op. For example, if you buy a condominium, you will have to pay the real estate taxes on the property.
Another point of fact to consider is that in New York City, there are fewer condominiums available than there are co-ops. About 80 percent of the available apartments in New York are co-operatives. Co-ops, however, are less expensive than condos.
Condo vs. Co-op – What’s the Difference?
Most people who already live in Manhattan have a relatively firm understanding of the real estate market and how it differs from other cities. This is particularly true in regards to the trade-offs between a condo and co-op. However, if you’re new to New York City, or are thinking of moving there soon, you may want a better understanding of what type of real estate will work best for you.
The differences between a condo and a co-op can be somewhat complicated. For example, depending on the neighborhood, there may be more co-ops than condos available. The co-op ownership vetting process can be strict, but that usually translates to greater financial security for the building. It can also be highly discriminative, especially when finances are concerned.
Although most people coming to New York feel like they must buy a condo, there are many factors to consider so that you end up buying the property that best fits your needs. Understanding the difference between a Condo vs. Co-op is an essential step before beginning your home search. Home Buyers or investors looking to purchase in New York City face a choice that those interested in other real estate markets don’t have to consider.
Pros and Cons
Each choice offers its pros and cons, but many new to the city’s real estate market often ask themselves, “Why on earth do co-ops even still exist?” Those that already own property in the town – whether it be condo or co-op – however, don’t have such a flippant attitude. The coop ownership structure in the New York City effectively added another layer of regulation to the city’s housing industry, thus saving it from the subprime crisis to an extent experienced by no other city in the US.
In all, somewhere between 70% and 80% of all housing in the New York City is co-op housing. While that share is falling steadily, it is a relatively slow trend, and the market will continue to be dominated by coops for some time to come. That said, the co-op ownership structure did not precisely rise from the best of traditions: It was a mechanism for large apartment buildings to screen out unwanted applicants of various types, usually of class or social lines – or even racial lines, though never explicitly.
Co-op boards continue to be somewhat snooty, especially the wealthier ones. The process of applying to live in such a place is often more rigorous than trying to get into an Ivy League college. Fortunately – and perhaps ironically – this snootiness curbs demands for coops, and so their prices are, on average, 10 – 30 percent less than the typical condo regarding price per square feet.
Another barrier to entry that keeps the average price of coops lower than condos is that they often require more money to be put down up front. Sometimes there are even clauses saying this money cannot be money from a bank loan but has to be the buyer’s pre-existing cash reserves thus purchased 100% in cash. One good thing about co-ops, though, is that the money you pay your share of the building’s taxes and mortgages is deductible from your income taxes.
Also, once you are actually in one, the arduous admissions process that you went through will have to be completed by all other potential neighbors, thus saving you from the possibility of living next to Kid Rock or some other similarly lovely character. Also, some of the oldest, most prestigious buildings in Manhattan are coops. Of course, the same can be said about condos, but the point is that many coops have a certain old-money flare to them that condos often eschew. Other than those benefits, though, there’s little to say in the way of coops. Condos are especially better as investments. They are easier to buy and sell thus are a considerably more a liquid asset.
Estimated time to close a Condo purchase 1-2 months
Instead of owning shares in the cooperative, when people buy condos, they are purchasing real property. They receive a deed, and they pay taxes and ownership fees. They also have the right to sublet if they so choose, or sell the property according to their desires.
Condo Closing Costs Learn More
As more and more new buildings are constructed in New York, condominiums are fast gaining in number and popularity. It’s not surprising considering the ease of buying a condo rather than a co-op. As opposed to a cooperative, a condominium apartment is “real” property. A buyer receives a property title (deed_ just as though he or she were buying a house on an individual plot of land. Each apartment in a condominium gets its tax bill. There is still a standard monthly charge similar to the maintenance charges in a co-operative.
These charges don’t include your real estate taxes and are not tax-deductible. They also tend to be lower than in co-ops because there is no underlying mortgage for a condominium building. The straightforward nature of buying a condo coupled with the fact, that in some cases, you can finance up to 90% of the purchase price and sublet them at will, makes condominiums the number one choice for flexibility. Young buyers, investors, and buyers that choose to use creative financing are urged to consider condos.
In a co-op, owners only own their unit and common grounds until they decide to move, at which point ownership transfers back to the corporation. They cannot transfer title or ownership at any point and in reality never indeed own anything. Condominiums are a different story. When buyers purchase a condo, they receive a deed and yearly taxes and other ownership fees. They can sublet their condo or sell it outright if they so choose.
Key Condo Factors
- Financing Options – Although condos allow for 90% financing, most banks in today’s market require 20% down.
- The Application Process – The acceptance ratio for condominiums is much higher than those for a co-op, and no board interview is needed.
- 3. Common Charges – There are often standard charges for a condo, but in most cases, they are considerably lower.
- 4. Taxes – Must pay real estate taxes, which can be deductible in many cases if those deductions are carefully itemized. The truth of the matter is that, in New York City, there are many more co-ops available than condominiums. The good news is that the gap between the two is narrowing. Currently, the ratio of cooperatives to condos is 75 to 25 percent. In the 1990s, the rate was 80 to 20 percent. In the 1980s, it was 85 to 15 percent. This gradual shift has been taking place because apartments in newer buildings tend to be sold as condos. In areas with more modern developments, there are higher numbers of condos available for purchase.
Advantages of Condos
- Higher visibility and availability for buyers locally and international
- Flexible financing options; most condo buyers can finance up to 90% of the condo’s selling price
- More natural application process with higher acceptance ratios
- Lower common and maintenance charges usually
- Condos have flexible sublet policies
Disadvantages of Condos
- Closing Costs are higher for Condos
- Flexible financing and purchasing process can attract less qualified buyers and investors that could be forced to sell at a lower price during distress
- Co-ops owners cannot sell for whatever price they want to whomever they want
- Most Co-ops charge sellers a flip tax of 1% – 10%
- Flexible sublet policies can attract more renters that could cause more significant wear and tear on the building
A disadvantage of purchasing a condo is the higher overall cost since there aren’t nearly as many condos as there are co-ops. This is changing quickly as new condo developments pop up all over the New York area.
Estimated time to close a Co-op purchase 3-4 months
The word “co-op” is short for “Cooperative,” which has more in common with a business arrangement than with owning real property. For example, as a resident of a co-op, you don’t own your apartment – a corporation owns the building or complex. Residents are not owners; they are shareholders of the corporation. The legal relationship is that of a “proprietary lease,” which allows the resident to use the apartment, but does not imply ownership.
A phenomenon that’s limited almost entirely to New York City, cooperative apartments have been the traditional form of owning an upscale co-op for close to a hundred years. In fact, in New York City, 70%-80% of all apartments available for purchase – and almost 100% of the grand pre-war apartments on Fifth, Park and Central Park West – are in co-operative buildings.
The more significant your apartment, the more shares of the corporation you own. Co-op shareholders contribute a monthly maintenance fee to cover the building expenses. The fee covers such items as heat, hot water, insurance, staff salaries, real estate taxes and the mortgage indebtedness of the building. Portions of the monthly maintenance fees are tax deductible due to the building’s underlying mortgage interest. Also, shareholders can deduct their share of the building’s real estate taxes.
A co-op Board of Directors can determine how much of the purchase price may be financed and minimum cash requirements. Co-op apartments require a more substantial down payment than most condominium apartments, especially in top buildings, whose ownership requirements may be stringent.
Subleasing a co-op can be difficult. Each co-op has its own rules, and they should be carefully reviewed before application to purchase. An apartment corporation owns cooperatives. When you are buying in a co-op building, you’re buying shares of the corporation that entitle you, as a shareholder, to a “proprietary lease.” Co-op “shares,” include both the residence and a portion of the common areas of the building, including the laundry or fitness area, lobby, etc.
Key Co-op Factors
- Apartment Size – The number of shares you own in the co-op is directly tied to the size of your apartment. The more significant your apartment, the more shares you will hold.
- Co-op Approval – To move into a co-op, the board of directors must first approve your application and interview. This allows the board to weed out individual’s they don’t accept of living as part of the co-op. This kind of discrimination could be a good thing or a bad thing depending on your acceptance ( We cover this more extensively in our article “Co-Op Interview Tips.”)
- Down Payment – The down payment for a co-op is more than is expected for condominiums. Down payment fees start at 20 percent and can go as high as 50 percent. In the most prestigious cooperatives, financing isn’t allowed.
- Other Expenses – As a member of the co-op you are expected to pay for your apartment, but also a portion of the monthly maintenance expenses that cover building amenities if any, real estate taxes, heat, insurance, water, staff salaries and building management company.
- Landlord-Tenant Relationship – Co-op shareholders are considered tenants of the co-op, as opposed to owners. This grants them legal protections according to the New York City landlord-tenant law. Condominium owners don’t have this advantage.
Advantages of Co-ops
- Lower cost to purchase, Co-ops 10%-30% less expensive than like-kind Condos
- Owners receive “shares” in the entire building–and therefore own–the building’s common features
- Due to strict subletting policies, the majority of a co-op is end user thus take better care of the common areas
- Owners may be eligible for some tax deductions
Disadvantages of Co-ops
- When financing is allowed the minimum down payment is 20% or higher
- Difficult application process with the risk of board rejection
- Co-ops impose strict subletting policies
- Co-ops owners cannot sell for whatever price they want to whomever they want
- Most Co-ops charge sellers a flip tax of 1% – 10%
Co-op House Rules
Co-ops tend to have stricter rules, particularly when it comes to having a dog, loud music after 10 p.m., or installing a washer-dryer. These are possessions and actions that will have to be approved by the co-op. They are mainly strict when it comes to subletting.
Should the board approve renters, they reserve the right to accept whom you sublet to and the duration of time. For co-ops that allow your subletting, most require that you reside in the apartment for no less than two years before doing so. The subletting also likely will be limited to one or two years maximum.
Another frustration occurs because many of the rules tend to change on a whim. You are at the mercy of the board, as they could only decide items like washers and dryers will no longer be part of the co-op. The corporation first pays the real estate taxes, mortgage of the building, salaries, and maintenance; that cost is then split among the owners of the residences, each owner paying an amount that is about the “share” that he or she has in the building.
In a co-op, the building’s Board of Directors decides whether to accept applicants as owners or not. A potential buyer fills out an application and interviews with a representative of the building. Rules and ownership details vary by building, so ask for additional information before agreeing to buy. Also, ask what the corporation’s tax structure is, as owners are sometimes eligible for tax deductions.
One of the disadvantages of living in a co-op is the final down payment expected. Although financing is an option for some, most will be expected to pay quite a bit more than the traditional ten percent down. 50% is not uncommon, and some co-ops don’t finance at all, assuming full payment up front.
- 1 Condo vs. Co-op – What’s the Difference?
- 2 Pros and Cons
- 3 New York City Condos
- 4 Estimated time to close a Condo purchase 1-2 months
- 5 Overview
- 6 Key Condo Factors
- 7 Advantages of Condos
- 8 Disadvantages of Condos
- 9 New York City Co-ops
- 10 Estimated time to close a Co-op purchase 3-4 months
- 11 Overview
- 12 Key Co-op Factors
- 13 Advantages of Co-ops
- 14 Disadvantages of Co-ops
- 15 Co-op House Rules
- 16 Board Approval