CONDOS

When you purchase a condo, you receive a deed as if you were buying a house. A condominium is a single unit in a multi-unit building in which you have both separate ownership of a unit and an undivided interest in the common spaces of the building. Like houses, condos are considered real property, because you’re the sole owner, you’ll be responsible for paying the monthly real estate taxes attributed to your unit and the common charges which cover the buildings operating costs.

Buyers are not subject to board approval; however, condo boards have the right of first refusal on every purchase. Prospective purchasers do not have to meet condo board financial requirements, there is no interview, and subleasing is generally allowed with no restrictions. This means a condo can be used as an investment or a pied-a-terre, since the owner is not required to live there.

Disadvantages of Buying a Condo

• More expensive compared to co-ops

• Real estate taxes are not tax   deductible

• Lower occupancy rates equal more turnover

COOPS                                    

Purchasers of a co-ops buy shares in a multi-unit apartment corporation allocated to a particular unit. Ownership of the shares entitles the buyer to a long-term proprietary lease for the unit. When you buy a co-op, you don’t actually own your apartment, you own shares of a co-op corporation that owns the building. As a result, property taxes are included in the monthly maintenance fee along with common charges that cover building expenses.

Under cooperative ownership, shareholders are generally required to occupy their apartments as their primary residence. That rules out anyone seeking an investment, vacation home or a pied-à-terre. Most co-ops restrict or forbid subletting. Prospective purchasers endure a rigorous application and approval process, including an in-person interview with the building’s board. Subsequently, after spending months searching for an apartment and going through the approval process, a buyer can be rejected. Co-op Boards have the power to deny an applicant without providing a reason.

All co-ops offer tax advantages. Shareholders can deduct their portion of the building’s real estate taxes, portions of their monthly maintenance expense and the interest on the building’s underlying mortgage. Finally, most co-ops have a flip tax, which can be 3% or more of the sale price, generally paid by the seller at closing, used to build up the building’s financials.

Disadvantages of Buying a Co-op

• Sales are subject to board interview & approval

• Minimum down payment restrictions

• Co-op must be primary residence (no investors)

COOPS VS CONDOS – TOTAL CASH REQUIREMENTS

The total cash required to purchase a co-op as opposed to a condo differ greatly in two main areas: the down payment and required cash reserves. The down payment required for a condo generally has more to do with the percentage permitted by bank financing than any other factor. With co-ops, however, the board requires a larger percentage down payment than an equivalent condo unit would command.

For Example:

A two-bedroom co-op unit is listed for sale at $1,000,000. The co-op board requires a minimum down payment of 20 percent, or $200,000. An equivalent two-bedroom condo unit is listed for sale at $1,200,000. The condo does not have any financing restrictions, and the minimum down payment required for financing is only 10 percent of the purchase price. The down payment required to purchase the condo would be $120,000.

Co-ops also require the purchaser to have at least two years’ worth of liquid assets left over after the down payment in order to demonstrate the ability to pay mortgage and maintenance fees in the event they become unemployed. Assuming the co-op’s maintenance is $1,500 per month, and a mortgage payment of approximately $3,500 per month, total monthly carrying costs would be $5,000 per month, which indicates a post-closing liquidity requirement of as much as $120,000. Added to the down payment requirement of 20 percent (which could be as high as 50 percent), the total cash needed for purchase would be $320,000, which is substantially more than what is needed to purchase the condo, pre-closing costs.

Although the listed price of the co-op is $200,000 less than that of the condo, the upfront cash necessary to purchase the condo is $200,000 less than that of the co-op.