Thursday, January 5, 2012

What is the Difference between a Condo and a Co-op??

This is a question I've been bombarded with ever since I listed a fantastic property in a co-op recently.  Atlanta doesn't have many co-ops (cooperatives), so most folks around here do not know what a co-op is. 

Unlike a condo, in a co-op, you don't really own property.  You own a share value in a corporation and the corporation owns the property.  You still have exclusive right to use the individual unit that you are purchasing in much the same way you would have the right to use/own the individual unit you would purchase in a condo, but the ownership is different.  In a condo, you along with all other owners, own all the buildings, grounds and improvements together.  Your individual ownership is the paint on the walls and the interior space of your unit (unless the by-laws of the condominium state differently).  In a co-op, you have the exclusive right to live in and improve/renovate, etc.  a unit, but your ownership is in a stock share and a corporation owns the real estate.  You and the other share owners own the corporation.

Here are 5 ways a Co-op purchase is different from a Condo purchase.

1.  You do not use a GAR (Georgia Association of Realtors) Purchase and Sale Agreement.  Instead, the cooperative will usually provide a Purchase Agreement form.  This is because you are buying a share (like a share of stock) instead of actual real estate.
2.   A buyer would usually go before the co-op board to be approved to live in the co-op.  Different co-ops can have different guidelines for the approval process.  We've all seen movies where the buyer of a co-op has to be approved by a bunch of snippy old bitties and the buyer is trying to make a good impression because they can get such a great deal in Manhattan, but they have some big dirty secret to hide....So it is a bit like that with out all the Hollywood dramatization. The upside of this is that you could potentially have a say as an owner of who gets to be a neighbor.
3.  A co-op price is usually way less than a comparable unit that is a condo, but the co-op fees are usually much higher than condo fees.  The reason the monthly fees are higher for  a co-op is that the corporation which owns the co-op may have a blanket mortgage on the co-op.  The mortgage has to be paid back by the share-owners.  Part of the monthly fee is the individual share-owner's portion of the mortgage that is amortized and divided among the share-owners.  Also, the entire co-op community is taxed as one parcel.  The entire property tax amount is divided among the share-owners and is charged out to each individual share-owner which is included in the monthly HOA fee.  Additionally, many times some of the utilities, insurance, HVAC maintenance and repair, etc. may be included in the monthly HOA fee.
4.  It is somewhat difficult to get a mortgage to buy a co-op.  The reason is that the corporation which owns the co-op may already have a mortgage on the entire complex.  Since a buyer is purchasing stock and not actual real estate, they may not be able to get a "second mortgage".  Usually, the cooperative will provide some financing to assist buyers.  One of the advantages of this is that a buyer would not be subjected to strict underwriting guidelines as they would for applying for a traditional mortgage.  This is especially helpful to self-employed people, buyers with credit issues such as a foreclosure or short sale in their history, buyers without a lot of established credit, etc..  The downside is that many times the financing provided by the cooperative may not be competitive with regular mortgage rates and loan terms.
5.  The value of a co-op is not as subject to swings in the real estate market as a condo.   The reason for this is that typically the purchase price of a co-op unit is considerably less than a condo as mentioned previously.  Since you are buying a share value in a corporation, valuations are not as closely tied to what's happening in the real estate market.  When purchasing a co-op, you are purchasing the share value plus whatever the market will bear for the improvment or condition of the unit that the owner is asking for.   Also, unlike a condo, sales are not dependent on an appraisal based upon most recent sales (since these appraisals for condos are used to obtain a mortgage, and a mortgage is not used to purchase a co-op unit).

It's imporant to note that a co-op owner may be able to deduct mortgage interest paid from their taxes as you would in deducting mortgage interest on your primary home of a condo or single family house.  If the corporation has a mortgage on the property, they will send out statements to each share-owner at the end of the year stating what portion of interest that share-owner has paid.

While buying a co-op is not for everyone, there are several distinct advantages for buyers.  For more information about some of the co-ops right here in Atlanta visit atlanta cooperatives.  To see the co-op I have listed (it's really quite fablous and only $100,000 in the Buckhead/Midtown area) click here.

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