What Is the Difference Between Co-Ops and Condos?

Cooperative buildings, also known as co-ops, are often associated with New York City. That's 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 big 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. Palion is the CFP and founder of Master Plan Advisory in East Norwich, New York.

Other hotbeds for co-ops include San Francisco, Atlanta, Boston, Seattle, Detroit, Chicago, Tucson, Phoenix, and many cities in Florida.

But what are the differences between condos and co-ops? Learn about the differences, including their ownership structure, financing options, taxation, prices, taxes, fees, and oversight entity.

Ownership Structure

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 better or worse than the other. It's merely a matter of preference.

Some prefer condo residency because they offer outright ownership. On the other hand, co-ops sell fractional ownership through shares that are specific to the unit. Either type of dwelling qualifies for homeowners insurance.

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."

The structure itself is not the responsibility of the co-op buyer. That's 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. It often ranges from 80% owner-occupied to 50%. This can help prevent the complex from turning into an apartment rental, which can lower values. Most co-ops do not allow subleases or rentals.

Financing

Whether it's a co-op or condo, a bank can still repossess it 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 that's 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. The property is secured by a trust deed or mortgage, according to state laws.

Pricing, Taxes, Dues, and Fees

The co-op committee or board approves a unit's sale price. The co-op board 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.

In the case of a co-op, the building pays the tax bill. It is divided among the tenants and factored into their monthly maintenance fees. These fees can be used to pay the salaries of a doorman, staff for upkeep, and a building superintendent.

In a condo, the tax bill applies directly to the unit because the buyer owns the unit. 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.

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. For instance, there isn't a way to prevent a booming drummer from moving in next door. On the other hand, Co-op shareholders fully vet each other during the admissions process.

They often require an interview. They also will actively dig into an applicant's financial statements, assets, liabilities, credit reports, and bank accounts. They may also request letters of personal and professional recommendation.

The process may first appear to be a severe violation of confidentiality. But shareholders approve of it because it allows them to pick and choose others who buy into the co-op and live 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, they have 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. Discrimination is illegal.

Co-ops can be more costly than condos in the long run. This is even more true 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.

The Bottom Line

If you value your freedom and being able to do what you please, when you please, you may prefer a single-family home.

"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," said Palion.