The good, the bad, the ugly of condos, co-ops

The primary benefits of buying a condo (or co-op) include: (1) condos are usually less expensive than equivalent-size houses; (2) lack of exterior maintenance responsibility and worry; (3) the security of just turning the key in the door (called “lock and leave”) while being gone for an extended time period without worry; (4) virtually the same homeowner tax deduction benefits as for houses; (5) pride of ownership; and (6) resale profit potential as a long-term investment.

But the potential drawbacks include: (1) having the homeowner’s association (HOA) board of directors determining how your monthly assessment fees will be spent; (2) encountering unexpected increased monthly fees and/or special assessments for major expenses, such as a new roof or other expensive repairs if the reserves are not adequate; (3) rules and policies you don’t like (such as no-pet rules, rental limitations, and parking restrictions); (4) poor-quality management and/or maintenance that hurts condo enjoyment and resale values; (5) noise from adjoining units (the #1 complaint of condo residents); (6) lack of freedom, such as the ability to turn up your TV as loud as you want or to have noisy parties; and (7) adjacent neighbors you don’t like, or who don’t like you.

Purchase Bob Bruss reports online.

CONDOMINIUMS, TOWNHOUSES, COOPERATIVE APARTMENTS AND PUD (PLANNED UNIT DEVELOPMENT)–WHAT IS THE DIFFERENCE?

Condominiums are just airspace within the unit surfaces. Legally known as “vertical subdivisions,” condominium owners own just the expensive airspace between their floor, ceiling and walls to the inner surfaces. The building structure is owned by the HOA, including the plumbing and wiring. The HOA usually also owns the common areas, such as hallways, elevators, land and parking areas.However, sometimes the common areas are owned by the individual condo owners as tenants in common, with the HOA responsible for maintaining the common areas.

Condominium owners often have the exclusive use of a specific additional area, such as a patio, balcony, storage area, and/or garage parking space. But the HOA usually has maintenance responsibility for those exclusive control areas that are part of the common area.

Townhouses and PUDs (planned unit developments) are slightly different. Townhouses are usually two-story condominiums with common walls shared with the adjoining townhouses. A few townhouses include ownership of the land beneath each townhouse, but many do not include the land that is owned as a common area by the HOA. However, if the townhouse is part of a PUD, then the homeowner usually owns the land beneath their unit. Either way, the HOA is responsible for the townhouse exterior maintenance, just as it is for traditional condominiums. Of course, individual townhouse and PUD owners are responsible for their interior maintenance, such as a dripping faucet or a plugged toilet.

Cooperative (co-op) apartments are in buildings owned by a non-profit corporation with each stockholder holding a proprietary lease for their apartment. Co-ops involve the sale of personal property that is the co-op stock certificate with its attached proprietary lease rights to occupy a specific unit. But condominiums involve the sale of real property because the condo owner actually owns the air space within their condo unit. However, Congress has made co-op ownership tax deduction benefits virtually the same as for condos. Most co-ops are located in New York, Florida, Georgia, California, Illinois and Washington, D.C. A prime reason some potential condo conversion buildings became co-ops instead of condos is condos are usually subject to tough subdivision laws, whereas co-ops are much easier to create because they often don’t require tough government approvals.

CONDOMINIUM OR CO-OP – WHICH IS BEST?

Financing a condo purchase is almost as easy as financing a single-family home purchase. An individual mortgage or deed of trust is recorded as the security device to pledge the condo for repayment of the home loan.

But co-op financing is much different and more difficult. When a co-op building is new, there is usually one master mortgage on the entire property. For income tax purposes, each co-op owner is allocated a portion of the mortgage interest and the property tax deductions. Original co-op buyers usually pay 10 percent to 20 percent cash down payments, with the master mortgage financing the 80 percent to 90 percent balance.

However, as the master mortgage principal balance gets slowly paid down, and, hopefully, as the market value of each co-op unit goes up, each co-op owner’s equity grows. That sounds good. But it can be bad! When a co-op owner decides to sell, because an individual mortgage can’t be recorded against a co-op corporate share, financing the sale can be very difficult. The reason is real estate lenders want to be secured by a mortgage or a deed of trust pledging the property as security, but this isn’t possible with a co-op because there is only one master mortgage on the entire property.

However, co-op financing is usually no problem in areas with many co-ops because lenders have accommodated “the co-op problem.” For example, in New York City where there are thousands of co-ops, the New York banks routinely make loans to co-op buyers, secured by their co-op shares. But in areas without many co-ops, most banks don’t want to be bothered with co-op loans. To illustrate, in California the few remaining co-ops (which haven’t been converted to condos) can be extremely difficult to resell unless (a) the buyer pays all cash or (b) the seller will finance the co-op buyer’s purchase. At the moment, I don’t know of any institutional lender willing to finance the sale of a California co-op apartment.

Due to the difficulty of financing co-op sales, many existing co-ops have wisely converted to condominiums so each unit can have its individual mortgage or deed of trust financing. Converting to condominiums usually increases a co-op’s market value by at least 25 percent, often more. Yes, there are co-op conversion expenses, such as hiring an attorney to prepare the legal paperwork and hiring an engineer or surveyor to create legal descriptions for each condo unit. But these initial expenses are usually repaid many times over when the converted condo is sold or refinanced at increased market value.

Another major co-op problem is co-op buyers are subject to the dreaded approval by the co-op board of directors. Some co-ops make approval of prospective buyers easy and painless. But other co-op boards of directors make buyer approval seem like an inquisition. For example, there are many horror-story examples of well-known personalities who were refused approval, such as Rush Limbaugh who was rejected for a co-op purchase (perhaps he tried to buy in a New York City co-op filled with liberal Democrats, whereas he is a conservative Republican!). Maybe you remember ex-President Nixon who was rejected by a New York City co-op board that said he “wouldn’t fit in.” However, a co-op board need not give any reason for rejection of an applicant. The unpleasant result is sometimes subtle discrimination – the result is some New York City co-op buildings are virtually 100 percent Jewish and others are almost 100 percent non-Jewish.

The alleged reason co-op boards scrutinize a prospective buyer’s finances so carefully is if a co-op buyer can’t pay their monthly fees, plus any special assessments, the other co-op owners must make up the missing payment or risk default on the master mortgage. Because so many prospective co-op buyers refuse to bear their financial souls to co-op directors, most buyers prefer buying comparable condos even though they cost more – most condo HOA directors don’t have the right to approve or disapprove prospective condo buyers. However, some condo HOAs have a “right of first refusal” to match any purchase offer received by a condo seller – but this right is rarely used because the HOA usually doesn’t have the funds to buy a unit that comes up for sale.