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Condos vs. Co-ops

While condominium and cooperative apartments are superficially very similar to one another, under the hood, there are significant differences. Knowing how to handle these differences can make the difference between a smooth transaction for your client and a bumpy one.

When you buy a condo, you own the unit itself and a certain share of the common areas. You may not have bought land, but you did buy real estate. When you buy a co-op, though, you’re not actually buying real estate. Instead, you’re buying shares in a corporation (or occasionally an interest in a trust) that owns the building and all the units in it. Those shares come with the exclusive right to rent a specific unit in the building.

On a day-to-day basis, you might not notice much of a difference between these two arrangements, but to the attorney handling the transaction, they’re like apples and oranges. We cannot emphasize enough that the contract used for the transaction needs to be a co-op specific contract. Using a condo-style contract for a co-op transaction works about as well as trying to ride a bicycle down the stairs. You can do it, but you’re going to have a bumpy ride and probably get hurt. CAR publishes a very good co-op contract, but you need to be careful that you’re using the current version (January 2020, to the best of our knowledge), as there are a lot of outdated versions floating around. Don’t use the Multi-Board 7.0 contract, as it’s poorly suited to co-op transactions.

Perhaps the most visible difference between condos and co-ops is that a co-op’s board has the right to approve or reject a buyer. Typically, the buyer will be required to submit an application, often with details of their financial situation, to the board and then to schedule an interview with the board. Sometimes, background checks or references are also required. If the board decides to reject the application, then that’s it. The transaction is over, and the buyer needs to find another property. TO AVOID DELAY, it’s important to reach out to the co-op’s board early to find out what their requirements are and to begin the process of seeking approval.

Another important difference is that since the whole building is owned by a single entity, individual units don’t have their own property tax bills. They don’t pay taxes directly to the county. Instead, the corporation pays them as a common expense. This may make assessments look high in comparison to condos, but be sure to remind your client to take the lack of a tax bill into account. This also means there’s no haggling during attorney review over tax prorations.

You should be aware that many lenders and title companies are not very familiar with co-ops, and that the transaction will be a lot smoother if the buyer uses companies that know how to handle them. Some lenders may flat out refuse to finance a co-op purchase. You should also know that co-ops are not generally suitable as investment properties, as their governing documents almost always forbid occupancy by anyone other than the owner and their family.

The documents involved in the purchase of a co-op are also different. First, since there’s no actual real estate changing hands, there’s no deed. Instead, the seller needs to sign over their stock certificate (or if the building is owned by a trust, provide an assignment of beneficial interest). There’s also an extra step, in that the buyer needs to sign a proprietary lease provided by the board of the co-op. The terms of the proprietary lease typically look very similar to the declaration of a condominium, the main differences being that they’re not always recorded publicly (most buyers choose to record a memorandum of lease instead), that there’s a separate one signed by each owner, rather than a single document that automatically applies, and that they’re theoretically limited to 99 years.

Finally, just like an owner can’t sell their interest in a co-op without the board’s permission, they also face the same restrictions on giving it away. Even if they want to give their co-op apartment to a friend or family member, the recipient needs to go through the same approval process as any buyer would in order to have the right to move into the co-op.

Co-op transactions aren’t inherently any more difficult than condo transactions, but it’s easy to make a misstep if you’re not familiar with their differences. You may want to consider consulting an attorney when prepping the contract if there’s anything you’re unsure of, rather than waiting until the contract has been signed.