Curious about the difference between condo and co-op apartments in NYC? Condos and co-ops have a number of differences which you should familiarize yourself with as a home buyer in NYC.
Co-ops in NYC are typically less expensive and have lower buyer closing costs, however co-ops have a rigorous board application process and subletting restrictions.
The largest difference comes in the form of the ownership structure: buying a condo means that you are buying real property and have a title, while buying a co-op means that you are purchasing shares in a corporation that owns the co-op building.
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Co-ops Are Not Real Property
Buying a co-op apartment means you are purchasing shares in the corporation that owns the co-op building. Along with shares, you receive a proprietary lease which entitles you to occupy your specific apartment within the co-op.
The number of shares you own in a NYC co-op is determined by a range of factors including square footage, frontage, number of rooms in the unit, outdoor space as well as the floor of your unit. There is no correlation between the number of shares owners may have in different buildings, as each co-op corporation apportions shares differently.
Co-ops Do Not Have Titles
A condo is a more traditional form of ‘real property’ ownership in that a unit owner has a physical deed to the apartment. The ownership structure of a condo is similar to that for a house or land. Owning a condo is also considered a “fee simple” or “freehold” form of real property ownership.
The contrasting ownership structures of condos and co-op apartments do not affect what it means to own an apartment. Whether you buy a condo or co-op apartment in NYC, you are entitled to live in the apartment until you sell your apartment.
There Are More Co-ops than Condos
There are significantly more co-ops than condos in NYC. The greater supply of co-ops vs. condos is one of the main reasons why co-ops are less expensive than condos. As of 2018, available apartment inventory in NYC is roughly 75% co-op and 25% condo.
Co-ops historically accounted for 80-90% of NYC’s condo supply during the 1970s and 1980s rental conversion boom. Due to the influx of new condo construction in recent years, the number of condos as a percentage of the available NYC housing supply has been increasing.
Each neighborhood in New York City has a slightly different inventory breakdown between condos and co ops. The Upper East Side, West Village, Upper West Side and Gramercy Park, for example, have a larger percentage of co-ops whereas neighborhoods such as Battery Park and FiDi have a larger percentage of condo units. Most co ops in NYC are pre-war buildings. Buyers of co-ops tend to prefer the older and more historic features of the buildings as well as the old-world character they exude compared to the mostly generic, glass facades of new construction.
Condos are More Expensive Than Co-ops
Condos in NYC are 10-40% more expensive than comparable co-op apartments. Condos are more expensive because there are fewer condos than co-ops (meaning less supply) and condos are investor friendly (meaning more demand).
Furthermore, buyer closing costs for condos are approximately 2.5% higher than for comparable co-op apartments. Buyer closing costs are higher for condos because of Title Insurance and the Mortgage Recording Tax. These two closing costs only apply to ‘real property’ which means that they only apply to condos and houses (not coops).
Seller closing costs for condos are 1-2% lower for co-ops. This is because most co-op buildings charge sellers an additional closing cost called a flip tax.
Buyer Closing Costs are Higher for Condos
Buyer closing costs for condos in NYC are at least 2.5% to 3% higher than for comparable co-op apartments. Because condos are considered ‘real property’ (unlike co-ops), condos are responsible for the Mortgage Recording Tax (if financing) and Title Insurance. If you are financing a co-op apartment purchase, you will avoid the Mortgage Recording Tax because co-ops are not real property and the tax only applies to real property.
Condos Require Title Insurance
Mortgage lenders will require that you purchase Title Insurance if you are buying a condo apartment. The average cost of Title Insurance in NYC as of 2018 is 0.4% to 0.5% of the purchase price. For a $1m apartment, that would mean your Title Insurance closing-cost bill is approximately $5,000.
Title Insurance is not required for co-ops since they do not have physical titles. If you are buying a co-op apartment, your attorney may conduct a lien search instead. The combined cost of Title Insurance and the Mortgage Recording Tax for a $1m condo (with 80% financing) amounts to approximately $20,000 in extra closing costs compared to what you’d have to pay when buying a co-op apartment.
Seller Closing Costs are Higher for Co-ops
NYC home sellers can expect to pay an additional 1% to 2% in closing costs when selling a co op (versus a condo) due to the flip taxes imposed by the co op board on sellers within a building. A seller flip tax of 2% on $1m co-op apartment in NYC amounts to $20,000 in extra closing costs compared to what you’d pay as a condo seller in NYC.
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Co-ops Have Subletting Restrictions
NYC co-ops impose the strictest rules on its residents ranging from severely limited sublet policies to noise regulation, pet policy and limitations on unit renovations and improvements. A typical NYC coop sublet policy is designed to encourage owner-occupancy, and therefore the policies can be quite restrictive and even cap the number of years that shareholder is permitted to sublet his/her unit.
The most common co-op sublet policy in NYC permits submitting 2 out of every 5 years after you’ve resided in the apartment for an initial occupancy period of 1-2 years. In more extreme cases, a co-op may restrict the maximum amount of subletting during the lifetime of ownership to 1-3 years.
Structurally, co-ops are managed by a Board of Directors which is elected by the shareholders of the corporation (unit owners). The Board of Directors are given the autonomy to enforce the co-op’s House Rules, vet potential buyers and work with the management company to maintain the co op building. A co-op’s Board of Directors has the ability to force a unit owner to sell his or her unit if the board deems that a material violation of the House Rules have taken place.
Co-ops Have a Board Application Process
NYC co-ops have strict financial requirements for purchasers in addition to a grueling board application process. A typical co-op board application will require submission of a completed REBNY Financial Statement, supporting bank and statements, tax returns as well as reference letters. The goal of the co-op board application is to ascertain your financial net worth, debt to income ratio, financial liquidity and demonstrate your willingness and ability to support the co-op financially and contribute to its community.
25% and 2 Years
A typical Manhattan co-op requires applicants to have a debt-to-income ratio of no more than 25% as well as post-closing liquidity of at least 2 years. D/I ratio is the percentage of your income which goes towards your monthly co-op maintenance and mortgage payment. Post-closing liquidity is how much in liquid assets you have after closing on the apartment.
Even if you can comfortably afford the co op unit and also furnish the required documentation, there’s still a very real chance that your NYC coop board package purchase application may be rejected by the co op board. The board has the right to reject you for any reason whatsoever with the exclusion of protected categories (race, creed, color, national origin, sex, age, disability, sexual orientation, marital status, citizenship, occupation, or the existence of children), and the Board of Directors has no obligation to provide the reason for the rejection.
Condos, on the other hand, have a much less rigorous application process which only rarely results in a rejection from the board. A condo may reject a purchaser by utilizing a right of first refusal, however this would require the condo itself to purchase the unit at the same terms being proposed between the prospective buyer and seller.
Another factor buyers must consider when choosing between a condo and co op in NYC is the ease of obtaining a mortgage. NYC co ops may force buyers to provide a significantly higher down payment of 20-50% compared to a condo which can be as low as 10%. If you are an investor, making a higher down payment will reduce your leverage and likely lower the IRR (annualized return) of your real estate investment over time.
Because of the more onerous board approval process with co-ops, it typically takes longer to close on a co-op apartment compared to a condo in NYC. The average closing timeline for a financed co-op deal is two to three months from the time a fully executed contract is in place.
Coops Have Higher Monthly Charges
Monthly common charges for co ops are often significantly higher than similar monthly fees levied by condos. This is because the co op corporation must pay for the underlying building mortgage, land lease and property taxes in addition to the standard fees levied by an apartment building to operate and maintain the building (employee salaries, utilities, repairs and maintenance, etc.)
Because a portion of the monthly common charges paid to the co op board is dedicated to the building’s underlying mortgage and real estate taxes, a portion of your monthly maintenance will likely be tax deductible. For condos, the monthly maintenance is usually not tax deductible however your separate payments for property tax and mortgage interest may be deductible against your income taxes.
On occasion, both a co op and a condo may levy temporary assessments on its residents. This is an additional temporary monthly charge which is used to fund major renovations or updates to the apartment building.
Home Office Deduction
There are also other quirks for which a condo owner may be able to deduct a portion of the common charges, such as in the case of having a home office. Please inquire with your CPA, real estate broker and real estate attorney to identify the specific tax deduction which applies to your unit and your own personal taxation situation.
Condo vs. Co-op NYC - FAQ
Should I buy a coop or condo in NYC?
If you are considering purchasing a property in NYC, the decision of whether you should buy a co op or condo in NYC is a tough one. Depending on whether you are an investor, potential long term owner, or looking for flexibility and/or safety, you can approach your decision using the following framework:
Condo vs. Coop NYC: Which is Best For Investors?
NYC condos are generally superior to co-ops as an investment property for the following reasons:
Easier to sell due to straightforward board approval process
Lower down payments and higher mortgage loan to value ratios are permitted
Ability to attract all-cash foreign buyers who wish to rent the unit
Ability to rent the unit more freely than for the case of a co op
NYC condos do have disadvantages to investor versus comparable co ops:
Condos are 10-40% more expensive upfront, meaning that an investor must be prepared to pay top dollar for a condo.
Condos are hard to find, as they account for only 25% of available supply in NYC
Condos generally have closing costs which are roughly 2% higher than for co ops because buyers must pay for Title Insurance as well as the Mortgage Recording Tax.
Condo vs. Coop NYC: Which is Best For Long Term Owners?
For long term owners and buyers who do not anticipate having to move in the medium term, a co op may be the best choice for the following reasons:
Very few renters / sublets
Strong sense of community and strict rules on behavior
Rigorous buyer approval process ensures financially sound and respectable residents
However, the downsides to buying a co op remain:
Hard to rent out if you plan on temporarily relocating
Harder to sell due to co op flip tax (1-2% of sale price), strict board application process, and higher down payment requirements for buyers
Is a condo or co-op more affordable for NYC home buyers?
Answer: Co op
Given the lower price of a co op relative to a condo as well as a co op’s reduced closing costs for buyers, more often than not co ops are more affordable than condos. However, potential buyers must also keep in mind that the monthly maintenance costs of owning a co op are significantly higher. It’s also harder to sell a co op due to the higher seller closing costs (resulting from flip taxes charged by co op boards), higher down payment requirements as well as the co op board’s ability to reject your buyer who may be financially sound.
Condo vs. Coop NYC: Which offers buyers the most flexibility?
If you want to have the flexibility to rent your apartment out in the future, sell your apartment without undue hindrance, make major renovations or simply not wish to participate in such a ‘strong’ and potentially intrusive community generally associated with a NYC co-op, buying a traditional condo is your best bet. Furthermore, owners of condo units generally have more liberty and flexibility to improve their unit with renovations and improvements without being subject to the onerous approval process of a co op board.
Which property type (condo or co op) is least risky for the buyer?
Answer: Co op
Co op purchases are generally viewed as less risky investments than condos for the following reasons:
Higher down payment requirement
Greater percentage of owner-occupied units and very few sublets
Strict co-op buyer approval process