Basics and Differences of Co-ops, Condos & Condops

If you’re planning to buy an apartment and you’re a newbie, you need to know the differences between an apartment that is a cooperative (co-op), and a condominium (condo) and the much rarer and often misunderstood conglomeration of the two, the condop. Condos are popular throughout the United States, co-ops are found in larger cities and make up the biggest chunk of the New York City sales market. Condops are few and far between and so little understood that one real estate broker, when asked to define them, said “I’m not really sure but is it legal?” Yes it is, see below. 

But first, a bit of history: According to an article in a monthly called The Cooperator, there are records of condominiums existing back in 2000 BC (were they in caves?). That would make co-ops practically newcomers, with the first in the world apparently created after a fire caused a serious housing shortage in Rennes, France in 1720.

It took another 150 years before the concept made its way across the pond to Manhattan. Historians don’t agree on where that first Manhattan co-op was built – some say West 18th Street in 1876, others 152 West 57th Street in 1881. Whichever it was, it was a concept that caught on. Now 75% of the market in NYC is co-ops, 25% condos, but that condo figure has been climbing steadily: In the 80s it was 15%, in the 90s, 20%. And for collectors of odd facts: Arguably one of the most well-known buildings in recent U.S. history was a co-op – the Watergate.

Here we’ll compare condos and co-ops – the two types of properties that you will most likely be considering. The odd conglomeration of the two – the condop – can come last since there aren’t many of those around.

Condos and Co-ops: The Defining Difference

When you buy a condominium, your apartment and a percentage of the common areas belong to you; you have purchased real property. When you buy a co-op, you have purchased shares in a building corporation, shares that allow you to occupy a unit in that building. At the closing for a condo you’ll be given a deed, very much as though you had purchased a house;  at the closing for a co-op, you’ll get a proprietary lease.  

Getting Accepted

You may choose a co-op or condo but that doesn’t mean that the co-op or condo will choose you. You will need to pass an approval process which can, especially in the case of a co-op, be long and sometimes arduous. You will have to submit a detailed information package to the co-op board cataloging any and all of your financial dealings. In a co-op, the board can approve or reject any potential owner and it takes extremely seriously its responsibility to protect the interests of all the owners by selecting the best candidates.

According to BrickUnderground, a New York–based real estate website, co-op boards are “omnipotent – almost. They can turn you down for just about any reason as long as it doesn’t violate the city’s Human Rights Law, which prohibits rejections for reason of race, creed, color, national origin, sex, age, disability, sexual orientation, marital status, citizenship, occupation or on the basis of how many children you have. Anything else is fair game – from how you part your hair to whether you have any at all. And for now, anyway, they have absolutely no obligation to tell you why they’ve rejected you.”

Stories about nightmarish co-op board requirements and interviews are legion in NYC in particular. Some boards even require that you bring your pet in for a board “interview” – really.

For a long time it was accepted wisdom that it was easier to be accepted by a condo board than a co-op board. Victoria Vinokur, an experienced real estate broker in New York City, agrees, but with a caveat: “Most people think that just because they are buying a condo there are no rules about anything but that is not the case,” she says. Generally, “the requirements of a condo board are not as rigorous as those of a co-op board but most condo boards do require application packages with financial disclosure.”  And the condo board’s approval process usually does not take as long as it does with a co-op.

Financing

Financing the purchase of a condo apartment is governed by financial markets, not a board of directors, and is therefore more flexible than in a co-op. Generally a buyer can finance up to 90% of the purchase price of a condo.

With a co-op, the down payment is set by the board, and some buildings require substantial sums. Vinokur says that “generally speaking, in Manhattan, prospective purchasers should be prepared to put down at least 20 to 50% of the purchase price.” 

Monthly Charges

In condos, the monthly bill is called “common charges”; in co-ops it’s “maintenance.” Both charges cover the upkeep of the building, payment of the staff and often water, gas, heat and air conditioning. Each month the co-op owner writes one check, while the condo owner writes two: one for the upkeep of the building and another for the unit’s real estate taxes. Co-op maintenance charges include the building’s real estate taxes and a share of the interest on the building’s mortgage, and they are often higher than a condo's combined common charges and real estate taxes. 

Both condo and co-op boards are allowed to add assessments to the maintenance/common charges to cover any major expense that may come up – an extensive repair, the need for more staff, etc.  

Rules

One of the reasons that many people are attracted to the condo concept is the perception that there are fewer rules than with a co-op. This is usually true but according to Vinokur, “one still needs to use licensed contractors for renovations and to get condo board approval for the work. And there are still rules for subletting and installing washer/dryers and whether or not pets are allowed.” 

The issue of subletting is often a red flag with co-op boards and one that they carefully regulate; in condos, subletting is easier to arrange. If you stick to the rules, which are usually not onerous, you can sublet your condo. This is why condos are the best choice as an investment property. (For more on investment properties, see: The Pros & Cons Of Owning Rental Property and Buying A Second Home To Rent: Dos and Don'ts.)

Tax Deductions

Co-op shareholders are entitled to take a tax deduction for the part of their monthly maintenance fee that represents their share of the building’s real-estate taxes as well as their proportionate share of the interest on the building’s mortgage. 

Condo owners get the same tax advantages/deductions as any other homeowner including a deduction for the interest on their mortgage. (See An Introduction To Buying A Condominium, for more information.)

And Now, About Those Condops

A condop is a category created in the 1980s by owners and developers who wanted to get around an IRS rule that threatened to stifle their profits. The rule stated that a co-op could not earn more than 20% of its income from nonresidential shareholders, which means commercial spaces. If the figure went over 20%, the shareholders couldn’t take a homeowner tax deduction. So, to fix that, owners and developers “divided” their building.

Many condops have substantial and very profitable commercial spaces but the residents and the owners of the commercial spaces need to be able to cooperate in order to avoid contentious interactions. If you are considering a condop, do some detective work to find out how well the two groups of players function and whether there’s any litigation pending.

“A lot of brokers use the term ‘condop’ to refer to a co-op building with condo rules,” says real estate attorney Adam Stone of Regosin, Edwards, Stone & Feder, rather than a building that is truly a condop. While some condops may have liberal policies toward sublets and buyers, “it wouldn't be because they are part of a condop,” says Robert Braverman of Braverman Greenspun, noting that “the co-ops I have represented in condops are every bit as tough on sublets and sales as any stand-alone co-op.” 

The Bottom Line 

The decision whether to buy a condo or a co-op (or a condop) depends on your finances; how comfortable you are about having those finances intensely scrutinized; the type of building you want to live in (one that is run as a cooperative community or one that is more like a loose-knit group of homeowners who share some common spaces and expenses); and ultimately, how comfortable you feel about following building rules that may  include whether you can sublet, play your piano after 10 pm or leave your boots outside your door on a snowy day. As always, any purchase as important as a home requires the advice of experts – knowledgeable real estate brokers, lawyers and financial advisors who can review the pros and cons of each type of purchase and advise you every step of the way.

For related reading on home-buying decisions, see Mortgages: How Much Can You Afford? and Comparison Of A 30-Year Vs. A 15-Year Mortgage.