Co-Op Vs. Condo: Differences, Pros And Cons
When we think of “home,” many of us picture the traditional single-family residence with a manicured lawn or white picket fence. But this housing option may not work for everyone. It’s important to remember there are other types of houses on the market, and “home” can look different for everyone.
Today, we’ll look at two home types that aren’t traditional: co-ops (or housing cooperatives) and condos. Consider this your official guide for exploring how these homes differ, what they have to offer and all things co-ops versus condos.
What’s The Difference Between A Condo And A Co-Op?
The main difference between condos and co-ops boils down to who owns the property. If you live in a condominium, you have ownership over your individual unit. If you live in a co-op, you own shares of a company that owns the building. As a co-op owner, you don’t own the unit. Instead, you own the right to live in the building and be a part of the community that manages it.
This difference in ownership leads to other differences between co-op and condo living. Here are other ways the home types can differ:
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Co-ops are better suited for short-term dwellers. Condos may better fit those seeking housing that’s more long term. Because a condo is a real estate investment, each monthly payment you make will help you build equity over time.
Co-ops can have high down payments depending on where you are, ranging from 20% to 30% in popular cities. However, the Washington Post found that most co-ops tend to be cheaper than condos per square foot. Another trade-off is that co-ops tend to have cheaper closing costs than condos since you don’t pay for expenses like title insurance.
At a glance, condos may seem to have cheaper monthly payments than co-ops. However, co-op payments are usually more inclusive, covering expenses like utilities, building maintenance, property taxes and other costs that don’t get rolled into a condo’s monthly payment. And with a co-op, you may be asked to contribute to the overall upkeep of a building, including maintaining common spaces or property updates.
It’s common for condo dwellers to be managed by a condo association. Much like a homeowners association (HOA), a condo association sets and maintains community guidelines, but at the end of the day, condo dwellers own their unit, which affords them the freedoms of a traditional homeowner, like the ability to renovate.
On the other hand, co-op residents pay for the right to live in the building. Because co-ops are owned collectively, any changes a resident hopes to make must be approved by the shareholders. Most co-ops hire a management company or assemble a board of shareholders to make decisions and oversee daily operations, including collecting fees and managing common areas.
By nature, co-op communities are usually tightly knit. While that’s great for camaraderie, this can make the approval process for getting into a co-op intimidating or lengthy. And if you want to make any changes to your living space, you’ll need to get permission first.
If you’re looking for a community with lots to do, a condo is probably a better match. Condos tend to offer residents a wide array of amenities. Here are some of the most common ones:
- Pool access
- Rooftop deck or lounge area
- Recreational sports areas and courts
- Event space
That doesn’t mean co-ops don’t bring anything to the table. Many co-ops provide common areas for residents – game rooms and lounge areas are the most common. And with a co-op, you’ll have some peace of mind knowing your fellow residents are similarly invested in preserving and maintaining the building and communal spaces.
It’s also common for condos and co-ops to have front desk service and third-party security to keep residents safe.
If you’re looking to break into real estate investment and think subletting may be something you’re interested in, co-ops aren’t the best fit. Most co-op boards don’t allow subletting, and usually, the ones that do only allow it under certain circumstances.
Condos, however, are a great option for buyers looking to generate passive income by renting out their homes. Condo associations rarely have rules against subletting because your unit is, after all, your property.
At first, the mortgage approval processes for co-ops and condos seem quite similar. You must choose your lender and get approved for a loan. Your lender must review the property you’re interested in financing to ensure it meets criteria like construction status and occupancy requirements. Only then will your lender move forward with approving a mortgage.
But if you’re moving into a co-op, eligibility requires a few more steps. Not only is it harder to secure financing for a co-op, but you must go through the co-op board’s approval process. It involves an in-depth application process, an interview and formal board approval before you can purchase co-op shares.
While condos are widely available in cities and suburban areas, co-ops are a bit harder to come by. You’ll usually find co-ops in densely populated cities and metropolitan areas. So for buyers who crave a more bucolic lifestyle, co-ops may not be the best fit.
Because a condo is considered real estate, most lenders will work with borrowers looking to finance one, which makes the process of buying a condo nearly identical to that of buying a house. Here are the types of mortgages generally available for condos:
- Conventional loans
- Federal Housing Administration (FHA) loans
- Department of Veterans Affairs (VA) loans
Financing a co-op can get tricky. Lenders are typically reluctant to approve co-op loans, and co-ops may have strict rules regarding financing. Depending on how you plan to finance, the co-op board may decide that you’re ineligible.
Additionally, when the time comes for you to move on from co-op living, it can be challenging to sell your shares. Even if you find an interested buyer, they must be approved by the co-op board before you can sell.
Benefits And Drawbacks Of Co-Ops Vs. Condos
Whether a co-op or a condo is right for you will depend on your financial situation, personal preferences and homeownership plans. Let’s look at what co-op and condo living has to offer and considerations to keep in mind before leaping in either direction:
- Exclusivity: You may not know anything about your neighbors in an apartment building or condo, but with a co-op, you may have a say about who moves into the community. Plus, you may enjoy some peace of mind knowing everyone in the building went through the same rigorous screening process you did.
- Less responsibility: With a co-op, the experience may feel more like renting versus owning a home. You aren’t personally responsible for the upkeep of common areas. Depending on your co-op association, your building may work with a property management company to help with building maintenance.
- Tax deductions: Although co-ops aren’t considered real estate, co-op shareholders may qualify for homeowner tax deductions, which can include real estate taxes. Depending on where you’re located, you may be able to deduct interest on your loan, your share of interest on the building’s mortgage and even certain maintenance fees. For more insight, consult a qualified tax professional.
- Real estate: Perhaps the biggest advantage of buying a condo is earning equity on your property. This means your monthly payments are putting money back in your pocket, and any renovations you make could raise your home’s value.
- Maintenance: Like co-ops, many of the labor-intensive chores associated with homeownership are typically taken care of by a condo association.
- Amenities: Although you’ll pay association fees, many condo amenities could save you money elsewhere. It’s not uncommon for condos to provide their residents with recreational facilities that are within walking distance. And many condo associations host events for residents to foster a sense of community.
- No ownership/shared ownership: Unlike condos or houses, co-ops don’t offer the benefits associated with owning real estate. Co-op owners must also contend with the risk that a co-op member may default on a payment – though this is typically
- Strict rules: Before moving into a co-op, you should know its rules and regulations. It should be outlined in your leasing contract whether you can have pets, sublet, make renovations or must follow a curfew. With co-ops, you’re joining a community, not an independent unit, like you would with a condo. It’s not unusual for co-ops to have stricter rules than condo associations.
- Higher monthly fees: Although co-ops typically have attractively low prices, their monthly expenses can be high. Parking, utilities and other overhead costs are shouldered by all
- Difficulty financing and selling shares: Even in uncertain times, there will always be a market for home buyers looking for real estate. But it can be more challenging to find an interested buyer and sell off shares in a co-op. Even when you find an interested buyer, they may be denied by your co-op board.
- Size or storage: If you like a spacious home, be aware that most condos aren’t constructed this way. And if you have a large family, a condo may not be your ideal living space. Because condos are connected structures, you’ll rarely have the tall ceilings or open-concept designs you may find in a single-family home.
- HOA fees: While condos are relatively affordable, you may pay hundreds or thousands of dollars in HOA fees on a monthly or annual basis.
- Parking: Condos aren’t the most vehicle-friendly housing option. It’s not uncommon for condos to have limited parking options, which can be difficult for families with more than one vehicle or if you plan to have multiple guests over.
The Bottom Line: Is Buying A Co-Op Or Condo Better?
Co-ops and condos are popular alternatives to single-family homes for good reason. But deciding which home type is better for you depends on where you want to live and what plans you have for your home.
If you’re interested in renovating, selling or subletting, a condo is better suited for your needs. If you’re looking for something short-term or plan to live in a bustling city, a co-op is an affordable option that isn’t your typical rental unit.
Ready to take the next step in your home buying journey and start shopping? Give yourself the best chance at success and apply for mortgage approval ahead of time.