Condo vs. Co-op's. What's the difference?

Anyone? Bueller?

I'm sure most of you out there are very familiar with condos, but you may not be familiar with co-ops - mainly because not may co-ops exist in DC.

You encounter co-ops much more frequently in NYC, and was made famous there when former President Richard Nixon was denied from purchasing a co-op. After President Nixon's resignation, he tried to purchase a unit in one of the co-op buildings in NYC only to be denied by the co-op board on basis that the owners in the building didn't want to attention and the media circus President Nixon brings. And in this little story basically summarizes the difference between co-ops and condos.

When you purchase a condominium, you clearly know the outlines of your unit, in a 3-dimensional space. Since you purchased your space, you can do almost anything you want to it without endangering or infringing on your neighbor's ability to own a home. However, in cooperatives, you don't own the outlines of your unit, in fact, you only own a share of the unit and you have the right to use that property. Basically, co-ops are more like a company where you purchase x number of shares of that company, and with those shares, you are given a right to use or rent (at no cost) the unit from the company.

Because of this difference, you have much stricter rules in co-ops where each purchaser has to be individually approved by the owners of that unit. The owners can decide to disallow you from purchasing a home in that building for any reason as long as the reason doesn't violate national and state Fair Housing laws. So, in essence, if everyone in the building owns Lexuses, and you drive a Honda, the owners can discriminate against you for driving a Honda. Of course, this is an extreme scenario, but can happen.

Then why would anyone want to live in a co-op? Co-ops were designed to specifically protect the owners against bad tenants. Just about all co-ops have rules against renting, where you can only rent out your unit for a year; maybe two consecutive years max. The idea is that tenants will not take care of their unit or the common area as well as the owners and they want to preserve the units. Therefore, theoretically, co-ops are better than condos. But then why hasn't this caught on with people? My opinion is that people don't understand co-op's fee structure, which is higher than condos and therefore did not want to bother with them.

But fear not, I'll enlighten you here.

When you purchase a condo, everything is clearly outlined. Here's the home for sale. Your "home" is bounded by this, the price is $400,000, your condo fee is $350 and it covers water,common amenities, etc. Very simple to understand. However, in a co-op, the fees are split up into two mortgages - the building's and yours. The building itself has a mortgage based on what it cost to build and was sold for to the original owners and you have another mortgage that pays for purchasing the shares of a particular property based on market price.

For example, if a 1 br co-op is on sale for $400,000, then the monthly payments usually get split up into $200,000 (usually somewhere in the 50/50 or 60/40 split) in your personal mortgage to purchase the share of the property and the remaining $200,000 gets paid to the co-op board in terms of the typical fees (similar to condo fees). In short, the amount of money you pay is the same, but how you pay changes depending on the co-op's financial structure. This is why people balk when they hear co-op fees of $1,500 per month, without realizing this distinction. Further co-op fees include taxes whereas condo fees do not - something most people don't calculate when first crunching numbers on what the buyer can afford. A $400,000 condo/co-op will run you anywhere from $300-500 per month in taxes and that is disclosed up front in the co-op fee.

In summary, the big difference between condos and co-ops is that co-ops have more right to accept or reject who lives in the building, and the exchange in funds are different. One more thing to note, however, because of the low popularity in co-ops in DC, many mortgage brokers don't know how to process co-op and may not be able to get you the loan. Think of it this way. If you avoid things that you're not familiar with, then the banks will too since they take on a huge burden. This doesn't mean co-ops are bad, but that you are limited in bank choices.