So recently I was helping one of my clients to sell his co-op in Capitol Hill. I received tons of phone calls during the first few days it was on the market. The same question keeps coming up. What is the difference between purchasing a co-op and a condo? Well, when someone purchases a condo/house, they are actually buying specific property. As for a co-op, you are buying shares in the cooperative corporation which owns the building and the land on which the apartment is located. Instead of a deed you receive when you buy a house/condo, with a co-op you get a stock certificate and a proprietary lease or occupancy agreement.
Does this mean that you won’t have the freedom to change the unit like repainting it? No, it doesn’t. You can easily make simple changes like repainting or installing shelves. As a cooperative owner, you have freedom to decorate and change the unit provided the change is not a major remodeling (of the kitchen or bathroom etc..); that would require the approval of the homeowner association similar to the approval required for a condo.
When you get a mortgage to buy a condo or house, the property is collateral for the mortgage. As for a co-op, since you are not buying a real property, you are not getting a regular type of mortgage. You will be getting a loan to buy the shares and a proprietary lease to live in the co-op unit. Your shares and proprietary lease are the collateral for the mortgage. The State of Washington does not consider buying a co-op a real estate transaction and therefore there is no excise tax levy when you are selling it.
A co-op is a very different type of home purchase. Most co-ops require interviewing the applicant. The homeowners will then decide if the applicant is a good match with the co-op. This can viewed as good or bad for someone buying a co-op. The intention for the interview is to screen out any undesirable tenants for the building. In a co-op where pets are allowed in the building, the home owner’s association sometimes will interview the pet as well. The co-op does have the right to reject an applicant if they feel that it is not a good match.
Banks view co-ops as higher risk loans because they can’t be sold or disposed of as easily as a house/condo. The co-op’s board of directors may put conditions on the sale of its shares. So why do some home buyer still consider co-op as a home purchase? Here are the advantages and disadvantages for buyer, seller and lender.
Homeowner Advantages
* Most co-ops will interview applicant to screen out undesirable tenants. Most of them do not allow renting of the unit. This will preserve the condition of the building better.
Homeowner Disadvantages
* Appeals to a smaller pool of buyers.
Buyer Advantages
* Tax inclusive in dues, usually lower tax compared to condos
* No exercise tax when selling the shares.
Buyer Disadvantages
* Fewer lender options
* Sometimes investors can’t buy it as a cash flow investment
* Usually involves more procedures than condo purchase
* Own share of the building rather than ownership of unit.
Financial Disadvantages
* Lender may have difficulty to sell because of the first right of refusal.
* More restrictions and thus higher risks for the lender.
At the end of the day, you need to ask yourself a few questions: are you looking for a home that has strong community living that has the old world charm and the condition is well preserved to call it a home or are you looking for a property that is easier to market to a bigger group of home buyers.
(NOTE: This is a blog, not legal advice and I am not a lawyer. The posts on this weblog are provided "AS IS" with no warranties, and confer no rights. Consult your attorney if making decisions based on the legal implications of condos and co-ops.)
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