THE CASE OF CONDO v CO
For those of you who are interested in home ownership but have an aversion to cutting grass, shoveling snow, and general property maintenance, condominium or cooperative living may be the answer. Both condominiums (condos) and cooperatives (co-ops) provide the benefit of home ownership with professional shared maintenance of the grounds and common areas. Most condo and co-op complexes also have communal recreational facilities such as pools, playgrounds, and tennis courts. These types of residences typically look the same to the naked eye and can be designed in the form of units in apartment buildings, semi-attached units, or even detached structures.
However, the legal structure of condominiums and cooperatives is quite different. Condominium units are owned in “fee simple,” which means that the home owner has all rights to their specific unit along with six inches into the walls. The outside of the walls, lobby areas, roads, lands, and recreation areas are considered common elements which are all jointly owned and shared by all of the unit owners in the complex under a separate entity called a Homeowners Association. A management company is usually hired by the Association to maintain the complex and to assess, bill, and collect the monies due to pay the taxes and the association fees. The common area taxes and maintenance costs are shared proportionally by all of the unit owners and are usually paid monthly to the management company for disbursement.
Condominium complexes may have special rules such as pet restrictions, parking requirements, or bans on renting, but homeowners always have a right to sell their unit at any time to a qualified purchaser. However, most condominiums have a “right of first refusal” rule which gives the complex the right to purchase the unit at the same price or greater than the pending sale. Typically, the complex will waive that right and the pending sale will proceed as expected.
Although cooperative units are also owned in fee simple, their legal structure is quite different than that of a condominium. Cooperative owners do not own their individual space; rather they have a long term lease of their apartment or unit. They are also issued stock in the cooperative corporation, which encompasses a share of the common elements as well as their proportional share in the building or complex.
Many times cooperative properties started out as rental buildings and were “converted” to cooperatives. In these cases, large loans are usually obtained to upgrade the buildings and grounds. These loans are secured by the property and are called underlying mortgages, which are shared by all cooperative owners. When purchasing a cooperative, one must be cautious that the proportional share of that underlying mortgage is not so large as to make the unit overpriced or unmarketable. Although cooperative unit prices are usually much lower than condominium prices, the monthly carrying costs of cooperatives are typically much higher than condominiums because of the underlying mortgages.
In contrast to condominiums, cooperative corporations are run by a Board of Directors who has the power to restrict the sale of individual units. So when an owner wants to sell their unit, the potential purchaser has to meet with and be approved by the Board. Unfortunately, these cooperative boards are given almost a carte blanche in their discretion to approve or reject a potential buyer. They can deny a prospective buyer for almost any reason-financially or otherwise. This severely limits the marketability of this type of property ownership and can be quite frustrating for cooperative owners who need to sell their units.
When considering the purchase of either a condominium or cooperative, one should make sure that the complex has a good “reserve fund” (monies put aside for major repairs) in order to avoid increases in monthly carrying costs to subsidize those repairs.
Prices of both condominiums and cooperatives are usually much lower than single family homes, which make them appear attractive to first-time buyers and retirees. The maintenance-free aspect of this type of ownership is also a large draw to those too busy to or not capable of maintaining a home. But one must be careful to consider all aspects of condominium and cooperative ownership, such as monthly fees and marketability before committing to that type of purchase.