2012 Oct 9th

Condos vs. Co-ops

Unlike NYC, where the majority of apartments for sale are co-ops (especially pre-war apartment buildings), in Hoboken most buildings are condos. Still, there are a couple of co-op buildings, like 920 Hudson Street in Hoboken and the Doric in Union City, and I am often surprised by buyers’ lack of understanding of the differences between Co-ops and Condos. So here is a brief primer:

What is a Co-op?

In a co-op, each person own shares of a corporation and the corporation owns the building.  Each owner has a proprietary lease to a particular unit that gives them the exclusive right to live in that unit.  Share ownership is proportional to unit size.

Owners pay a monthly maintenance fee.  It often includes expenses such as heat, hot water, building insurance, maintenance staff salaries and management company fees.  A crucial difference between a a condo and a co-op is that the maintenance fee of a co-op also includes real estate taxes and payment on the underlying mortgage on the building, if there is one.   As a consequence, co-op maintenance fees are typically higher than those of a condo at first glance.  When you consider that the co-op fee includes real estate taxes they become more  comparable to a condo where each owner gets a separate real estate tax bill.  Also, a large portion of a co-op maintenance fee is tax deductible (the real estate tax and mortgage payment portion) whereas condo maintenance fees are not deductible.

While both condos and co-ops have boards of directors, co-op boards tend to be more restrictive in certain areas.  Prospective purchasers usually must be approved by the board of directors. The buyer might have to provide information regarding finances and employment.  Co-op boards seek to ensure the financial stability of the owners so as to reduce the risk of defaults in the building. This may seem bothersome to a co-op buyer but benefits all the building’s owners.  Often times, snooty Park Avenue (NYC) co-ops don’t want celebrity rock stars or living in the building and Madonna was turned down by a her co-op board when trying to buy an adjoining apartment to hers.  Co-op boards are not required to give a reason for their rejection of an applicant.

Condo owners used to be able to rent out their unit at will, although that is starting to change due to the current lending environment.  Each co-op building has unique rules, but many co-ops limit the unit owners’ ability to rent.  Again, this may be an advantage or disadvantage depending on your goals. If you are an investor seeking to rent the unit out as income producing property a co-op may not be right for you.   The advantage of limiting rentals is that owners tend to take better care of the property and the common areas of their buildings than tenants do.  If you plan on living in the unit as your primary residence and you want to live in a building that is primarily owner-occupied with some limited control over the type of neighbors you are likely to encounter, then co-op living might be preferable.

What is a Condominium?

Condo apartments are “real” properties. Buying a condo is like buying a house. Each individual unit has its own deed and its own tax bill. Condos offer greater flexibility, but are often priced higher than comparable co-op apartments.  Condo buyers don’t have to seek board approval to buy. That may expedite your sale if you are the buyer or seller. On the other hand, you may not be as pleased if your neighbor sells his unit to Rob Zombie or the Insane Clown Posse. (Clarification – Rob Zombie and the Insane Clown Posse may be perfectly lovely neighbors, I don’t know them personally, but you get my point.)

The Lines Are Blurring

Since the 2008 financial crisis, banks have become increasingly more strict about lending to buyers.  For a bank to write a mortgage and sell it, which the vast majority of banks do with their mortgages, they much have a buyer.  Today, Fannie Mae is the only buyer of mortgages and Fannie Mae has requirements which the property must meet.  One of them is that there be no more than 49% of the units occupied by tenants.  Owner occupancy is seen as a good thing because people who live in their units are much less likely to walk away from their mortgages.  Buyers looking to buy in a condo building with a majority of the units owned by investors and rented out may have a very hard time getting financing.  As a result, some condo buildings are starting to pass rules limiting the unit owners’ ability to rent out their condos.  For example, 2 Constitution at the Shipyard, amended its master deed to prohibit investors from buying units strictly to rent out.  Many co-ops allow owners to rent out their unit for some set time period like up to three years, but only after having lived in it for a period of time first.  So one of the big differences between condo and co-ops is starting to go away.  A buyer should inquire into the rental policy of any building as part of his due diligence.

So Which Should You Buy?

Ultimately, only you can make the decision on whether a co-op or condo is best for you. If your job status requires you to relocate or travel frequently or you are looking for an investment property that you can rent out periodically, a condo may better meet your needs. If you are settled in your current position and are looking for long-term stability in a building where you can make long-lasting friendships, know and have control over who your neighbors are and appreciate them having a vested interest in the building and how it is run, then a co-op might be your best bet.

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