Learn about the advantages and disadvantages of purchasing a condo or co-op in New York City below.
The majority of New York City apartments are co-ops (cooperatives). Approximately 75% of residential buildings in New York are co-ops. Condos (condominiums) offer more flexibility when it comes to renovations and purchase financing is often easier to obtain. Co-ops are often less expensive to purchase but have higher monthly fees.
A cooperative forms when people join to own or control the housing and related facilities in which they live. The cooperative forms a not-for-profit corporation which owns the land, buildings, property rights and all interests in the corporation. The title to the property, as shown on the deed, is in the name of the corporation.
When you purchase a co-op unit, you are purchasing personal property — NOT real property. You are personally buying shares in the corporation that allows you to live in a unit of the co-op building. Shares of stock are securities and considered personal property. You do not receive a deed to your apartment. Instead, you receive a proprietary lease (a long-term lease) issued by the cooperative corporation. With a co-op you must pay maintenance fees — which can include a portion of real estate property taxes, heat and other expenses.
A condominium is an ownership structure whereby a building is divided into several units. The interior space of these units is individually owned. The surrounding common areas are jointly owned. When you purchase a condo unit, you own the unit. It’s considered real property and you receive a deed. With a condo, you must pay HOA (Homeowners Association) fees. If a condo community has shared spaces or amenities like a swimming pool, tennis court and security gates, those common areas are likely maintained by an HOA or condo association. Real estate property taxes, homeowners’ insurance, etc. are paid separately and not a part of HOA fees.
Condo prices are generally higher than co-ops. However, co-ops require a larger down payment, typically 20%, and have higher monthly maintenance fees. How much maintenance fees shareholders pay is determined by how many shares they own. Shares owned can be based on the size of the unit owned; the larger the size of the unit, the more shares an owner may have, resulting in higher fees. Those who own more shares, however, have more decision-making power. Closing costs for a co-op can be lower than the final expenses on a condo, as you won’t need to pay for some fees, like title insurance. New York State imposes a real estate transfer tax on conveyances of real property or interests when the consideration exceeds $500. Co-ops and condos may charge a flip tax, a transfer fee charged for the transfer of an apartment. The amount of the flip tax varies, usually one to three percent, and is usually paid by the seller. A mansion tax applies to buyers of personal residences purchased at $1 million or more, in addition to a supplemental tax on the mansion tax. This extra tax rate rises incrementally with residential real estate properties with purchase prices of $2 million or more, capping out at a total of 3.90% for properties sold at $25 million or above.
Mortgage lenders are more likely to issue loans for a condo than a co-op. One reason is because if a borrower defaults on a condo loan, the lender has real property to deal with rather than shares, which can be harder to sell. Another reason can be the status of a co-op building’s underlying mortgage. A purchaser of a co-op should consider how many mortgages there are and when mortgages mature for a co-op building. If a mortgage is maturing soon, it most likely will have to be refinanced at a large expense to the co-op corporation. Many lenders require that a minimum of two years remain on an underlying mortgage before making a loan to a co-op purchaser. Also, some lenders may not finance or refinance an underlying mortgage in a building that has more than thirty precent sponsor-owned apartments (apartments that are owned by the co-op corporation, or the building’s original owner before it went co-op).
Condo boards tend to be less demanding than co-op boards. Co-ops have a lengthier approval process, including an interview, which can take several months to finally close on a unit. The board of directors of the co-op decides whether or not a prospective buyer can purchase a unit. Co-ops board of directors do not have to give a reason to a prospective buyer as to why they were not approved to lease or purchase a unit. However, condo boards are less restrictive in who can purchase or lease a unit. Condo association may also require that they have the right of first refusal on the sale of a unit. Right of first refusal (ROFR) would give a condo association the contractual right to be the first buyer to submit an offer on a specific property. If the ROFR holder no longer wants to submit a bid, then the seller of a unit can then accept other offers and someone else can buy the property. Condos have bylaws, their rules and regulations, which residents must follow but are often less strict than co-ops house rules. Condos generally allow subletting of a unit, while only some co-ops allow subletting.
Condos can be more modern and up-to-date with current city and state building codes than co-ops. Many co-op buildings in New York City are Pre-War buildings — buildings that were constructed before World War II. To maintain the attractiveness, modernization and feasibility of a condo or co-op building and/or community, an assessment may be administered by the board/association. Generally, assessments are used to fund capital improvements in a building. Capital improvements can be anything from renovating the lobby to installing a new furnace system, to a restoration. Buildings will often have financial reserves on hand to cover small improvements or expected maintenance. However, for bigger-ticket items, the condo or co-op board may decide to assess owners to raise money for these improvements. Boards can choose to have owners pay for all the work up front or choose to finance the work — having unit owners service the debt over time.
While some capital improvements are cosmetic, such as renovating hallways or the lobby, others are required by law, such as renovating a building’s exterior or boiler maintenance. Boards must vote on the work and negotiate with their respective management companies to bid it out and receive quotes from various organizations.
Each apartment owner will be required to pay the assessment, as it is mandatory, not voluntary. The exact amount will be dependent on the interest of each owner, in addition to the total assessed amount and the duration over which the assessment must be paid. Failure to pay assessments can lead to the board filing a lien against your property.
A HOA/condo association or co-op board can limit how you can alter your unit, too. For instance, a co-op or condo owner can paint the interior of their unit any color they wish, but they might have to conform to certain building and community rules if they want to paint the exterior. Many associations and boards require an owner to submit an Alteration Agreement before any renovations can be started in a unit. An Alteration Agreement is a contract between a unit owner of a condo or co-op and the governing association of the condo or co-op. It confirms the governing association’s consent to a particular alteration by a shareholder or unit owner and sets forth the terms and conditions under which consent is given. Some documents required by the shareholder or owner to submit in addition to a signed alteration agreement could include the scope of work that will be done and a copy of the contractor’s license, liability insurance, workers’ compensation and lead certification.
In regards to value, co-op pre-war buildings have remained a worthwhile investment for buyers, especially for buyers that plan to hold their unit for at least ten years. Co-ops maintain their value and appreciate faster than condo developments.
Whether you are interested in purchasing a co-op or condo, it is important to consider the advantages and disadvantages of each type of property. Also consider your current and future personal and real estate objectives. If you are a first-time home buyer, searching for a second home for your expanding family, or a real estate investor, I look forward to the opportunity to assist you with your home and real estate ownership goals. Please feel free to contact me if you should have any questions. Be sure to follow me on Instagram and TikTok at @Keys2Memories for the latest real estate news and helpful tips. And, please feel free to share this article!
LaShawn Freeman, Douglas Elliman Real Estate Agent
Unlocking new memories, one door at a time.
M: 917.254.3313 / E: lashawn.freeman@elliman.com
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