Understanding the Difference Between a Condominium and a Cooperative

Question:  I have started looking for a small rental property and came across a “housing cooperative.” What are the differences between this and a condo? Can they both make good rentals?

The biggest differences between a Housing Cooperative and condo are the ways ownership is held, legality and financing.

Ownership

Housing cooperatives are not considered “real” property. When you buy into a Co-op you are buying into a corporation and becoming a shareholder.  As a shareholder, you will have rights to a particular apartment or unit within the building. This right is formalized by a lease with the tenant (shareholder) and the corporation. The size of the apartment/unit determines the proportion of the shareholder’s stock.

How is the ownership of a condominium held?  A condo is considered “real” property; you own not only your unit but also a percentage of the common areas.  As an owner of a condominium you have all legal rights of ownership, including the right to sell and restrictive covenant of use (that means there are rules that have to be followed).  The owner also receives a deed for the property.

Financing

A co-op can have a mortgage on the building that the corporation manages – this means that each shareholder will have a monthly assessment based on their proportionate share of the corporation which covers the following costs: mortgage if there is one, taxes, insurance and general upkeep of the building.  Financing for a Co-op as a shareholder was difficult until the 1980s, but now it is more freely available, though nothing like a traditional mortgage.  It is not a mortgage, instead it is called “share loan financing”.  It can be more difficult for an investor to get a “share loan” because Fannie Mae will only purchase these loans if the borrower is the occupant and it is their principal residence (sometimes they will consider a second home).

For a condo, because the unit has a deed there can be a traditional mortgage which makes financing for an investor easier.

Taxes

From a tax perspective they are treated the same as any real estate transaction. If there is a “share loan” secured by the stock and lease then all interest from that loan can be deducted.  Also, if the Co-op has a blanket mortgage on the property the shareholders will be able to deduct their proportional share of the real estate taxes and interest.

Approval

One of the other big differences I want to point out about Co-ops is that “ANY” prospective buyer has to be approved by the membership committee which is made up of current owners.  This process allows the committee to accept a new buyer or reject them.  The guidelines under which they can reject a buyer are limited to: financial where-with-all and/or unwillingness to abide by the terms of the association’s rules and regulations.

Under no circumstances can the applicant be rejected for reasons such as: age, sex, sexual preference or religion. In recent years however, there has been an added factor of “celebrity”. The concern is that they will bring things like “paparazzi” or tourist disruptions to their homes.  Here are a few names of celebrities that have been rejected: Barbara Streisand, Diane Keaton and Gloria Vanderbilt.

So there are opportunities with Co-op’s but be aware of the limitations.

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