Cooperative buildings, also known as co-ops, are sometimes associated with New York City—because it has so many of them. According to the NYC Department of Finance, there were 149,120 co-op units in Manhattan alone in 2020, compared to 68,526 condominium (condo) units. Condos didn’t become a phenomenon until the 1960s, when FHA guidelines made provisions for their financing.
“Procedurally, it’s easier for the owner of an apartment building that started as a rental to convert into a co-op than to a condo,” said Peter Palion, CFP and founder of Master Plan Advisory in East Norwich, New York.
Other hotbeds for co-op buildings include San Francisco, Minneapolis, Washington, D.C., Atlanta, Boston, Seattle, Indianapolis, Detroit, Chicago, Tucson, Phoenix, and several cities in Florida.
The differences between condos and co-ops include their ownership structure, financing options, taxation, prices, taxes, fees, and oversight entity.
Both co-ops and condos answer to an oversight entity. For co-ops, it is a committee or board; for condos, it is a Homeowners Association (HOA). One is not more or less desirable than the other. It’s merely a matter of preference.
Some desire condo residency because they offer outright ownership, where co-ops sell fractional ownership through shares that are specific to the unit. Either type of dwelling qualifies for homeowners insurance coverage.
According to Palion:
“Homeowners insurance for a condo covers the walls, the floors, and the ceiling because the unit belongs to the owner. But when you buy insurance for a co-op, it’s like a renter’s policy that covers the contents but not any of the structural items.”
In fact, the structure itself is not the responsibility of the co-op buyer because they have only purchased the right to occupy the unit, not the unit itself.
Many condo complexes limit the number of rentals as a percentage of the total units, ranging from 80% owner-occupied to 50%, so as to prevent the complex from turning into an apartment rental, which can lower values. Most co-ops do not allow subleases or rentals.
The differences in ownership do not preclude a bank from repossessing either a co-op or condo in the event a buyer is unable to pay back the mortgage. But unlike co-ops, HUD-approved condos can be financed through FHA mortgages. However, only certain banks participate in co-op lending—and only after it’s determined that the co-op is a qualified building on the bank’s approved list.
Condo units—which can be part of a single level, multiple levels, or detached—are financed separately, and the property is secured by a trust deed or mortgage, according to state laws.
Pricing, Taxes, Dues, and Fees
It is the co-op committee or board that approves a unit’s sale price and a co-op board that can decline to approve the purchase price of a unit if it’s so low that it could impact the value of other shareholders’ units. In the case of condos, HOAs do not hold the power to prevent a sale or purchase.
When it comes to dues and fees, both a co-op and condo buyer pay monthly maintenance, but the condo owner pays to the HOA while the co-op member pays to the board.
Fees and dues paid to the HOA are typically for maintenance of common areas, the exterior of the building, the roof, association management, and could also include some of the utilities such as water and trash pickup, as well as amenities such as the clubhouse, exercise facilities, swimming pool, or spa.
In the case of a co-op, the building pays the tax bill, which is divided among the tenants and factored into their monthly maintenance fee; this can be used to pay the salaries of a doorman, maintenance staff for upkeep, and building superintendent.
In a condo, because the buyer owns the unit, the tax bill applies directly to the unit. Specifically, a condo unit is assessed separately for tax purposes with the understanding, in most cases, that the buyer owns the space between the walls, floors, and ceilings, usually to the midpoint. Taxes are then paid directly to the county assessor or through a lender's impound account.
While the fees paid to a co-op might be higher than a condo's HOA, if improvements are proposed to the common area of a condo, owners who are opposed to the project often walk away dismayed.
“They will be assessed some dollar amount of the cost if the other condo owners and HOA approve it,” Palion said.
Boards or Committees and HOAs
When buying a condo, there is no selection process of the neighbors, and there isn't a way to prevent a booming drummer from becoming a neighbor. Co-op shareholders, on the other hand, fully vet each other during the admissions process, requiring an interview and actively digging into an applicant’s financial statements, assets, liabilities, credit report, and bank accounts, while requesting letters of personal and professional recommendation.
While the process appears to be a severe violation of confidentiality, shareholders approve of it because it allows them to pick and choose others who buy into the co-op and reside in the building. In contrast, condo owners can live in a condo complex for years and never truly know their neighbors.
Because co-ops are governed by a committee—appointed by co-op shareholders—the committee has the right to reject or approve a potential fractional owner. But Fair Housing rules were enacted to prevent a co-op board or committee from taking the selection process too far—by outlawing discrimination.
Co-ops can be more costly than condos in the long run, especially when a buyer holds a personal mortgage while also paying the building's co-op mortgage. This is often refinanced to pay for the building’s capital improvements.
Some co-ops prefer owners who maintain the unit as their primary residence. As a result, foreign buyers, investors, or second-home buyers are not permitted to acquire a unit.
The Bottom Line
Homeowners who value their freedom and being able to do what they please, when they please, will prefer a single-family home, according to Palion.
“When you move into one of these developments, whether it’s a condo or co-op, there’s someone there potentially telling you what you can and cannot do, and what you must spend your money on.”