Condominiums ("condos") and cooperatives ("co-ops") are forms of "common interest ownership" in real estate. Both are arrangements in which you and others have some type of ownership interest in a particular piece of land; but in neither case is it the same type of ownership as with a "regular" home.
Condos and co-ops are often confused with one another because they are quite similar. Each gives the owner the right to use certain common areas, like pools, roads, and perhaps a community meeting room. But, there are differences between the two, particularly when it comes to what a condo owner and co-op owner actually "owns."
If you're thinking of buying a condo or co-op, you'll want to learn more about what they are and how they work. Both can be good alternatives to buying a single-family home, due to the shared amenities and low maintenance. But condos and co-ops do have downsides, such as restricting or limiting your ability to make structural changes to your living space.
What Condos Are and How They Work
With a condo, you own and hold title to a single "unit." A unit might be an apartment-like space in a building with multiple units, or it could be a unit that stands alone from but is connected to another unit, perhaps by a common wall. The owner is ordinarily allowed to make changes to the inside of the condo unit: paint, install new carpeting, or renovate the kitchen.
You don't own anything outside of your condo unit, however, not even the exterior walls.
Common areas of the condo complex are owned by all of the condo owners collectively, and you share them. Common areas include recreation areas, hallways, parking lots, and courtyards. You have the right to use and enjoy the common areas only; you can't make changes to them. So, even if the hallway paint is peeling, you're probably not allowed to repaint it.
Condos are usually managed by a "homeowners'" or "owners" association (HOA), which is responsible for making sure the property is well maintained. The association also has the power to make assessments, that is, charge the condo owners fees to maintain the property. These normally include:
- Regular or ordinary assessments, or monthly maintenance fees, which are used to pay for things like road repairs, landscaping services, snow removal from parking lots and roads, and insurance for the commons areas or elements of the condominium property.
- Special assessments, which usually are levied to pay for expensive, necessary repairs or improvements that were not part of the association's operating budget, such as repairing damage from storms that was not covered by insurance or providing access to a municipal sewer system.
Condo owners are usually subject to special covenants, conditions and restrictions ("CC&Rs"), which typically restrict and limit how you can use your property. These are enforced by the homeowners' association or HOA. CC&Rs can include things like a ban on pets, limitations on paint colors and curtain styles, and a limit on the number of vehicles you can keep in the parking lot.
What Co-Ops Are and How They Work
In most ways, a co-op is similar to a condo, except that co-op residents don't actually own their particular unit. Instead, a cooperative entity, which is usually a corporation, owns and holds title to the land and building. The co-op resident owns and holds stock in the cooperative-corporation. The stock gives the resident a lease for a particular unit, which usually can be renewed.
A co-op resident usually can't do anything to the inside of the unit except ordinary maintenance, like carpet cleaning and maybe repainting. The co-op resident may not be allowed to make improvements or renovations to the unit.
All residents have the right, of course, to use and enjoy common areas of the cooperative, like elevators, hallways, and recreational facilities.
Co-ops are managed by a board of directors, which perform the same functions as a "homeowners'" association: The board assesses and collects "monthly maintenance fees," enforces CC&Rs, and keeps the property in good repair. Unlike in condos, however, the board decides who can buy stock and thereby live in the co-op.
Each state has laws that cover enforcement of condo and co-op rights and duties, and each condo and co-op has its own rules as well.
Be certain to check those laws and rules before you sign purchase agreement. If necessary, get some help from an experienced real estate law attorney.
Pros and Cons of Condo and Co-Op Ownership
Condos and co-ops can be advantageous to prospective homebuyers, because they're usually less expensive than a single-family home, and they're low maintenance: You don't have to paint the outside, cut the grass, or shovel snow.
There are other advantages and disadvantages to keep in mind:
- Portions of your co-op's monthly maintenance fee, like the parts for property taxes and mortgage interest, are tax deductible, while none of the monthly fee for a condo is tax deductible. You can take full tax deductions for property taxes and mortgage interest on your condo.
- A co-op's monthly fee usually is much more than that for a condo.
- There may be restrictions on your ability to rent out your condo or to sublet your co-op unit to someone else. It is not uncommon for condominiums and co-ops to prohibit such leases and sub-leases.
- The contents of the CC&Rs in either a particular condo or co-op might not make either a good choice for you, especially if you've enjoyed the freedom of making decisions about the upkeep and improvements to a single-family home.
- You can finance the purchase of a condo just as you would any other home (like a mortgage), but with a co-op, you'll have to find a lender that's willing to hold your co-op stock as security for repayment of the loan.
Questions for Your Attorney
- Can you help me examine whether this condo or co-op community is financially stable?
- What can happen if I refuse to pay a special assessment?
- What can you tell me about whether this particular set of CC&Rs will be difficult to live with or not?
- If I sublet my condo, am I responsible for any special assessment or is my sub-tenant?
- What can I do if I think a co-op refused to sell me stock because of my religion or other discriminatory reason?