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Condo or Coop?

While coop apartments are not entirely unique to NYC, there is no other place where they make up a majority of the housing stock as they do here. The crux of the distinction is that a coop apartment itself is actually not real estate, rather the apartment's owner is a shareholder in the corporation which owns the building and has a lease to reside in the specific apartment.

So what does this mean? It means you still "own" an apartment, but there are some strings attached. Since a potential buyer of a coop apartment is seeking membership in a private corporation rather than purchasing real property, the corporation can pick and choose to whom to extend membership. Thus the dreaded coop board packages and even more dreaded coop interviews. While the corporation can't base its decision to reject a potential shareholder based on membership in a protected class, boards do not articulate the underlying reasons for a rejection which has in the past resulted in the exclusion of minorities. Now it means that a coop board can require disclosure of all financial details and any personal information that will aid in their decision whether to approve a potential buyer. There are some scary boards out there, but most just want to make sure that the purchase is financially stable and will not default on their obligations. Your real estate agent can advise you as specific requirements and will help you prepare a board package.

In addition to the power to approve or reject potential new shareholders, the board can set rules curtailing certain ownership rights. For example, many coop boards restrict the right of an owner to rent out (technically, sublease) their apartments. Others may require that the apartment is used as a primary residence and not as a pied-a-terre.

Other differences exist, but are less significant. For example, individual owners of a coop apartment are not subject to property tax -- again since they don't own any actual real estate. Instead, the whole corporation incurs real estate taxes for the building, and each unit holder pays their share as part of the monthly maintenance charges. Thus there is a single "maintenance" for coop apartments (on listings the "% tax deductible" figure represents what portion goes to taxes), whereas condo or other real estate owners get separate bills for common charges and real estate taxes. In either case, the real estate taxes are tax deductible for individual unit holders and the total monthly charges are roughly equal all other things being the same.

Another example, a "mortgage" on a coop apartment is not actually a mortgage -- the collateral is not the apartment as it would be in a coop or other real property, but rather a lien on the shares in the corporation. For most intents and purposes, the loan is treated the same as a traditional mortgage, at least when dealing with lenders familiar with the NYC market (out-of-area lenders may be unfamiliar with NYC coops and not able to complete the transaction). Beware, however, that a mortgage recording tax of 1.8% (or 1.925% for loans over $500,000) will apply to loans on condos but not coops.

Some distinctions that work in favor of coop ownership? If the buyer is planning to finance part of the purchase price, coops have much lower closing costs as they are not subject to the mortgage recording tax (since it's not really a mortgage...).

Now that we've covered the difference between Coops and Condos, time for the practical part: What does this distinction mean in terms of inventory and pricing in NYC, and why should a buyer choose one over the other?

First some numbers: There are about 175,000 owner-occupied housing units in Manhattan in TOTAL! Manhattan is a very small island and mostly rentals—625,000. Of the 175,000 total owner-occupied units, 155,000 are coops and condos, and 70-75% of those are coops. Not only are condos fewer in number, they are generally about 30% more expensive on average than a comparable coop. Brooklyn is a bit less lopsided: though the resale market is still dominated by coops, the price difference is less pronounced, with coops about 10% less expensive than comparable resale condos.

In terms of available inventory, the number of new listings for condos has been growing while the coop market has been shrinking. The uptick in the condo supply is due mostly to the proliferation of high-end luxury development, which is pushing the relative prices even further apart with condos now about 44% more expensive on average than coops.

With coops generally more abundant and so much cheaper, why pay more for a comparable condo?

First, some purchasers simply may not qualify for or afford a coop. While they are more expensive, condos often require a lower minimum down payment amount so a liquidity-challenged purchaser may not be able to cough up the 20%+ down payment required by most coops. Even if a purchaser can afford the down payment, they may not qualify to purchase under a coop board's financial requirements. Coop boards may set rules on minimum financial requirements or may more informally deny applicants who they do not view as financially viable. The two biggest financial considerations for the coop board are debt-to-income ratio (usually 25%) and post-closing reserves (usually at least a year's worth of mortgage and maintenance payments after closing costs). This means that if a purchaser has limited savings or a relatively low salary, they might not qualify for a coop, or their budget for a coop might be much be much smaller than their budget for a condo, which has no such financial requirements.

Second, a purchaser might want to pay extra for certain freedoms. Like the freedom of not disclosing detailed financial and personal information to the coop board as part of the application process. Or the freedom to sell their apartment to whomever they choose rather than choosing a most qualified applicant and wondering if the board will approve or reject the purchase.

Beyond curtailing certain freedoms during the purchase/sale process, the coop board can also set rules regarding the use of the apartment. Most coops limit owner's ability to rent out their apartments (for example, may rent 2 out of 5 years, may rent for one year with the possibility of extension, may never rent...) whereas condos have no such controls. Some coops may require that the apartment be used as a primary residence and not a pied-a-terre.

There are many other factors that go into the determination of what sort of ownership is right for a particular purchaser, and many purchasers may fall into a gray area: Some coops might work while others won't, and comparable condos might be out of reach financially, so the trick is finding the right apartment based on individual circumstances and goals. Never fear, real estate agents are there to help sort through these considerations and find you the right home or investment property.

For any questions regarding the NYC home-buying process or residential real estate market, please reach out.

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