What's the Difference Between a NYC Co-op and a Condo?

If you have ever wondered what a co-op is or what a condo is, you're one of many. It's a common question that those working in real estate hear.

Knowing the difference between them and the purchasing process is crucial to any buyer considering either.

Co-ops or cooperatives may not be what you imagine. It's not a piece of real estate but a corporation with shares. These shares get divided among its corporation members.

What's unique is that these shares then get expressed as a proprietary lease of a residential unit in a building. Each team represents a specific number of shares.

For example, a two-bedroom apartment may hold 250 shares in a cooperative, while a one-bedroom apartment expresses 150 shares.

A condo or condominium is real property, unlike a co-op.

Each owner owns their residential unit but shares the real property and the condominium's common areas.

Condos are peculiar because the genuine property buyers purchase is essentially air rights, as many condo units are just a space within a larger structure or building.

From this perspective, it's easy to see that owning a co-op or condo unit is distinct from buying a home, a townhouse, or a building.

Do Co-ops and Condos Have Different Rules?

The exciting thing about co-ops and condos is that they are expressed differently, while real estate-wise, the rules governing both structures can be very similar.

They can be similar sometimes; the rules can be nearly identical, and some condos are now called condops.

But what makes them so similar?

Co-ops and Condos have boards that make up and enforce governing laws for their building. These rules are called bylaws.

It may seem like they are making up these bylaws to make your life more miserable, but they are to protect the bodies, the property, the community, and the values.

In the end, each member or owner should benefit from these rules.

How Do Cooperatives Operate?

Most cooperatives in New York City tend towards having a tight-knit community of homeowners and dwellers. However, you may find that some condo boards also lean towards this goal.

On the flip side, some co-ops can function closer to a condo community, which welcomes real estate investors and may have loose laws on subletting.

New York City cooperatives have a board with a board president.

They convene monthly to discuss the issues affecting the building(s) and residents, any renovation or repair work, assess maintenance and taxes, and approaches and sales.

Different cooperatives may meet at varying intervals. Some may choose to meet more frequently or less frequently.

More significant issues facing the community may call for member meetings and hearings. The bylaws also determine elections for new board members and presidents.

Expect to pay a monthly maintenance fee, which includes your taxes.

The maintenance fee usually includes essential utilities like gas, heat, and water. Some may consist of electricity or a reduced flat monthly fee.

Your maintenance fees are also usually paid for basic upkeep and security of the building(s). For more significant structures and complexes, a management company is hired for this purpose.

Some smaller co-ops are self-managed, and the board members or shareholders might all pitch in.

A certain percentage of your taxes are tax deductible. This is one of the benefits that co-op owners usually look forward to.

Maintenance costs and taxes can also be less than a comparably sized condo building, but this usually varies from co-op to co-op.

Are Co-op Rules Strict?

Most cooperatives tend to have strict rules about subletting. There are specific reasons for this.

Reducing subletting is more secure as residents will tend to know each other better than renters who may come and go.

Renters also don't tend to have the same sense of ownership, which would rule how they treat the property and their neighbors.

If a renter doesn't like a neighbor, they can move instead of working towards a better relationship. They may also not be as inclined to care for the property if they can move when the lease is up.

Furthermore, suppose a renter is not paying their landlord, who happens to be a shareholder or makes extensive damages to the apartment, and the shareholder faces financial hardship for this reason. In that case, the shareholder may default on their maintenance fees.

This is a way to reduce risk for the building.

Rules may vary; for example, subletting may never be allowed or only permitted after several years of shareholder occupancy.

Also, limits on lease terms and board approval may be imposed, as well as a surcharge.

Another cooperative may freely allow subletting immediately. One way to get around the rules is to buy directly from the sponsor.

Many co-ops may also impose strict rules on pet ownership. Some of this has to do with maintenance costs and hygiene.

However, sometimes, it involves getting incumbent tenants who may still be occupying units before the building is converted to a co-op.

Tenants (usually of rent-controlled or rent-stabilized units) who were renting before co-op conversion are protected by NYC tenant laws and cannot be evicted.

They cannot be forced to pay any maintenance fees either. Many of these original renters living in the building can pose a problem for the shareholders.

Prohibiting dogs or cats may discourage these renters from staying in the building.

Specific rules also govern the buying and selling procedure. Every prospective shareholder must receive board approval, pass financial requirements, and undergo an in-person interview.

Any person purchasing the co-op shares with the primary buyer must also receive board approval. The co-buyer must also reside in the designated residential unit in some co-ops.

Why Would You Want to Buy a Co-op?

With all the strict rules in place, you wouldn't want to bother purchasing a co-op.

However, there are a lot of benefits that shareholders enjoy.

Firstly, co-op units are often priced much better than condo units in the same neighborhood.

Of course, this depends from co-op to co-op, but generally speaking, the pricing of units is very affordable compared to traditional condominiums, houses, or townhouses of the same size.

Co-ops are perfect for getting your foot into a desirable neighborhood that you might typically be priced out of while, at times, getting the same.

Secondly, you might save money on maintenance and taxes.

Again, this can vary, but with sound finances and intelligent planning, many co-op boards can help shareholders pay less for good upkeep, utilities, and improvements.

Taxes also tend to be reasonably low if the co-op board can file for J-51 tax abatements periodically and as needed. Good management companies will also.

Thirdly, many co-op buildings have larger residential units than traditional condos.

Most of these apartments remained large because these are usually converted from pre-existing apartment buildings when developers usually built larger apartments with more closets.

Indeed, it is not valid for every single cooperative, but this holds generally.

Lastly, many cooperatives tend to be a community where neighbors are all co-owners and shareholders, so they look out for each other.

This is not always the case, but working together and living together can often affect community spirit.

How Do You Buy a Co-op Unit?

Buying into a co-op may be an intimidating process for many. But with the correct information and preparation, you, too, can receive board approval.

Most cooperatives require a minimum down payment. This percentage is usually higher than in a traditional house or condo.

Although you have the off-occasion of asking for only 5%-10% down, don't be surprised if you see a minimum requirement of 20%-40% down, which is far more common.

Co-ops trying to attract new blood into their community may reduce the down payment requirement to 5%-10% to make the prospect more attractive.

The down payment is just the beginning of a longer process. However, it doesn't need to take too long if you know exactly what they're looking for.

Passing board approval is a lot like getting approved for a mortgage.

Every board package is different and will require different paperwork, but they will be asking for a lot of the same documentation your bank will be asking from you.

These things can be passed tax returns, pay stubs, bank statements, asset statements, credit reports, debt statements, and employment documentation.

In addition, you'll be asked to include your loan application, commitment letter, and sales contract.

Co-op boards will also ask for additional written, professional, and personal references.

It's best to organize a clean board package, with a cover letter introducing yourself and stating why you want to join their community.

Organizing your package will make the review process much faster. Also, submitting your package promptly will move things along smoothly to make the next board meeting.

Remember that buying a co-op is not for everyone. A minimum credit score is usually required, so if you have a low score, this may not be an option.

The board needs to assess that you are of good character and will be paying your maintenance and taxes.

They try to assess your character when reviewing your referrals and interviewing you.

When they review your financials, employment history, and credit history, they ensure you can pay your HOA fees monthly and have reserves for hardship.

Is There an Easier Way of Buying a Co-op Apartment?

You can avoid all the trouble by buying a sponsor unit.

A sponsor is the originator of the co-op conversion. Usually, a former landlord or property owner decides to convert their rental building.

They will naturally hold all the units until purchased (typically, the right of first refusal is offered to the current tenants).

Once a renter leaves, the unit becomes available for the sponsor to put on the market.

The same rules usually don't apply for a sponsor unit, as your purchase counts as the very first purchase of the team or shares for that unit.

Many co-op bylaws, such as board approval and rules on subletting, do not apply.

When is a Co-op Not a Good Deal?

As a co-op board assesses your qualifications, you should also evaluate the cooperative.

Hiring an experienced attorney can help with this process.

It's up to your real estate attorney to review all the financials of the cooperative, the board minutes, and the offering plan.

Your lawyer can advise you on the cooperative's financial health. Not all cooperatives manage their finances very well.

This could mean high maintenance fees, high assessments, low returns on sales (depleted property value), and mismanagement of facilities and building(s), among other things.

Be on the lookout for rock bottom-priced co-ops that demand all-cash buyers. This usually means that the co-op's finances are in shambles and may not recover for some time.

In turn, it speaks poorly for the resale value and how the building(s) may be maintained.

Many co-op corporations continue to roll out mortgages and refinance almost continuously, which makes sense if it keeps maintenance fees low.

An adequately managed co-op will pay the mortgage on time with everyone's collected HOA fees and property taxes and have reasonable emergency reserves.

They'll make carefully thought out and planned assessments that won't break the bank for its shareholders and help the corporation's shares increase in value.

The Takeaway on Co-ops

How Do Condominiums Work?

The funny thing about condos is that they can be very similar--in fact at times identical to co-ops, the main difference being that you are dealing with real property as opposed to shares in a corporation.

Generally speaking, however, condos tend to be much more straightforward and lenient than cooperative.

There usually is a board in condominium buildings much like co-ops. They oversee the management of the building, but tend to be more lenient and hands-off with rules.

It's also true that your vote or opinion may have more clout if you own a larger unit in the building.

Larger condo complex like co-op buildings may hire professional management companies. Smaller buildings may find it more cost-effective to self-manage.

Are Condo Rules Strict?

They can be but usually aren't. The reason being that each owner actually owns their unit and they wouldn't be able to evict an owner.

Furthermore, each owner appreciates their own autonomy with their own property.

Rules may be imposed for common areas and community amenities as everyone is a co-owner of these areas.

Be wary of condo boards that behave like co-op boards, as that could mean fines and strict regulations as many view the whole point of a condo is that the rules are more relaxed.

What Are the Benefits of Buying a Condo?

While there are exceptions to the rule,buyers often prefer condos to co-ops because of the more straightforward buying process, less stringent rules, and owning real property.

Furthermore, it's possible to buy a condo in a brand new construction as opposed to co-ops which are normally conversions from older buildings and houses.

Condos tend to have good resale value, especially in a reputable development or building, albeit the unit is still in good condition.

Because the buying process is generally easier, that means selling is also easier. Sales can't be held up either because your co-op board decided to put a sales freeze.

Another reason to consider a condo is that it is perfect as an income-generating property. You can live in it or rent it out as you please, without board approval.

And lastly, many condos in New York City enjoy tax abatements. The 421a tax exemption can bring your taxes down from 10-25 years.

Unfortunately, since the 421a tax abatement program got a major makeover in 2016, new developments with this type of abatement will become scarce.

However, existing condo buildings can always apply for a J-51 exemption for any improvements and renovations as co-op buildings can.

How Do You Buy a Condo?

Some condo buildings have an application process similar to a board package, but not nearly as extensive and is more of a formality.

It usually involves an application with request for the loan application, commitment letter (if financing), contract of sale, and signed acknowledgement forms for rules and bylaws.

However, there definitely condo applications that require a full package, very similar to Co-op board packages, including reference letter.

There is no interview and they cannot reject the buyer unlike a co-op board, but you still need approval to go forward with the purchase.

They can make it very difficult by delaying the process and sometimes by motioning to buy the unit instead if they don't like something about the prospective buyer.

However, this almost never happens as they would need to put up a lot of money to purchase the unit.

As a reminder, they can still seriously delay the process by demanding additional paperwork and giving repeated delayed feedback and requests, eventually scaring away the buyer, who might be having second thoughts about living close to such board members.

Nonetheless, these instances are rare, and more often than not, the sales process tends to be very straightforward.

As with co-ops, there is no board process if buying directly from the sponsor, usually when the building first starts selling its units.

When is a Condo Not a Good Choice?

Condos tend to be flexible real estate option for many, but like other properties, there are always things to look out for.

If you're looking for the laid-back vibe a condo has to offer, you should be wary of lengthy condo applications, high fees, and requirements from the condo board.

Read all the rules and regulations and see if that's what you want to sign up for.

Even with new developments, one can't be too careful.

Some units might look like they have sleek modern finishes, only for new owners to discover the shoddy work and cheap materials.

While inspections are not the norm with new developments, you can always protect yourself with one.

The Takeaway on Condos

What Fees are Involved at Closing for Co-ops and Condos?

Co-ops and Condos impose a flip tax at the point of resale. This amount varies according to the sales price or shares and number of years of ownership.

This can range from 1%-3%. In co-ops, you're usually awarded a lower flip tax with longer years of holding shares.

You can also expect to pay the New York State and New York City Transfer Taxes. These taxes at the state and local level differ from each other and in price range.

The seller usually pays this one like the flip tax, but for new developments, this often gets passed onto the buyer.

For full details, read our piece on NY Transfer Taxes.

From the buyers' side, you'll need to pay the New York Mansion Tax on all sales of $1 million and up. The tax will also vary on price ranges.

The full picture is given in our article on the NY Mansion Tax.

Sellers of new development frequently have different expectations at closing than resellers.

Not only do they expect the buyer to pay the transfer taxes, but can also tack on the sponsor attorney fees and creation costs.