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November 8, 2017

Co-op vs. Condo: What’s the Difference Between These Types of Homes?

Urban dwellers and potential buyers who want to purchase a new home in a common building or community will likely consider two types of properties: co-op and condo. Although they’re similar in size and appearance, a co-op (short for “cooperative”) and a condo (short for “condominium”) are actually quite different.

To help you decide which property is right for you—and how buying one or the other will affect you financially—let’s take a closer look at the intrinsic differences between co-ops and condos.

Co-op vs. condo: What’s the difference?

The major distinction between these two properties is exactly what you will actually end up owning. A condo is a private residence owned by an individual or family in a building or community where the residents share common areas with the other condo owners.

“When you purchase a home in a condo building, you are buying the actual home and a share of the common elements of the building,” explains Ryan Hardy, a Realtor® with Gold Coast Realty in Chicago. Those common elements can include yards, garages, rec rooms, lobbies, or gyms.

But when you buy into a co-op, you don’t technically buy (or own) the property at all.

“You are purchasing shares of stock in a corporation or other legal entity that owns” the building, Hardy says. “You then are allowed to occupy a specific apartment in the building outlined in a proprietary lease that you receive with your stock certificate.”

Going co-op earns you the right to be a voting member of the building, which is sort of like being a voting member on a board of shareholders. Typically each resident who owns shares has an equal say in how the co-op is run and maintained. Residents typically vote on any decision that affects the building; they also elect certain residents as board members who carry out the group’s wishes. You also get a say in who else buys in the building.

“The pro is that you can pick your neighbors,” says Michelle Lane, a Realtor with Commonwealth Realty in Newton, MA. “But when you go to sell, the board has to approve your new buyer, which can delay the sale of your co-op.”

Another big detail to keep in mind about co-ops?The boards often require some hefty personal information before they’ll sign off on your buying the place. They may ask to see your personal tax returns and have you interview with multiple residents—even after you have received approval from a bank for a mortgage.

Financial concerns

Speaking of mortgages, co-ops typically restrict the loan to value ratio, or the percentage of the purchase price that a buyer is allowed to finance. The LTV varies among co-ops, but it’s common for them to require an LTV of less than 75%, Hardy says. Some co-op boards will even deny buyers who are financing the deal outright—requiring that they pay the entire purchase price up front with their own money.

Most condo associations, on the other hand, do not tend to restrict lending or financing in the building. If you can get a mortgage, the condo association will generally let you buy a place, Hardy says.

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