Many of my clients ask me about co-ops.  What are they? Should I buy one? How are they different from condos?

While they are more common in areas like New York and Washington DC, they are found in many places around the country.

Here are some facts about co-ops...

Basically a coop is the same as a condo.  You pay a monthly fee, you have a mortgage, you live in the unit, share common areas, buy and sell the unit...all the same.  However, there are some benefits:

First note that with a coop you do not actually take title - the unit is owned by a corporation - you are buying shares in the corporation and the corporation is giving you a proprietary lease to live in the unit as long as you own the shares.

1) When buying or selling the unit, you pay no transfer or recordation taxes.  (IN DC -other areas will vary), It means saving either 1.1% or 1.45% depending on the sale price. (On a $500,000 you would save $7,250)

2) When buying the unit, you do not buy title insurance.  Save about .5% (that's $2,500 on a $500,000 home).

3) Your coop fee pays the property taxes. So you are not only saving thousands of dollars, but part of your coop fee is tax deductible (the taxes that the coop is deferring to you).  Condo fees are not tax deductible.

4) Coops sometimes take out underlying mortgages to pay for large improvements (similar to special assessments in condos).  Underlying mortgages transfer to the new owners and the value of the mortgage is subtracted from the purchase price,  Underlying mortgage payments are just like mortgage payments; the interest on the payment is tax deductible.  Most coops do not have underlying mortgages however.

5) In DC most coops approve new owners using the same criteria a lender uses to assess their credit worthiness. 

So why doesn't everyone buy a coop???

1) Banks typically charge a slightly higher interest rate on the loan for a coop. 

2) Banks as well as many coops, require at least 5% down, up to 20% down.

3) Coops are not very investor friendly.  Many have restrictions on renting.  Making owners sell if they do not intend on living in the unit.  They may have other rules about selling - know what you are buying!

4) People don't always understand them! 

Note: For tax advice, please seek out a professional tax adviser.