Whether you’re just getting started with us as a new agent or just beginning your property search, it’s important to have a full understanding of the various property types available in New York City. For example, how are condo vs co-op apartments different? What about townhouses and multi-family properties?
Condo vs Co-op Apartments in New York City
1. Co-op apartments are not considered to be real property
It’s important to understand that co-op apartments are not classified as real property. That’s because a cooperative corporation actually owns the entire building and resident owners are shareholders of the corporation. Instead of a deed, each shareholder is assigned a stock certificate and proprietary lease to a specific apartment in the building. The proprietary lease grants the shareholder the right to occupy the apartment indefinitely as long as he or she is a shareholder. The number of shares you own in a co-op is determined by a range of factors including square footage, frontage, number of rooms in the unit, outdoor space as well as the floor of your unit.
Owners of condominium apartments are considered owners of real property. The interior of a condo apartment is considered real property and condo owners also have a proportional share ownership of the common areas of the building. Owning a condo is also considered a “fee simple” or “freehold” form of real property ownership.
2. Co-ops significantly outnumber condos in New York City
As of this writing, the city’s apartment supply consists of 75% co-ops vs 25% condos. The city’s apartment supply used to be comprised of 80-90% co-op’s during the rental conversion boom of the 1970’s and 1980’s. However, because most new construction units today are sold as condos, the percentage of available inventory that are condos has steadily increased.
As you may expect, each neighborhood will be different in terms of condo vs co-op mix. Some neighorhoods such as the Upper East Side will have a larger percentage of co-ops vs Battery Park City which will have a larger mix of condos. Most co-op apartments are in pre-war buildings. Buyers of co-op apartments sometimes prefer the older and more historical character of co-op buildings. More often, buyers choose co-op apartments simply because they are cheaper than condos.
3. Condos are more expensive than co-ops
Condos are typically 10-20% more expensive than a comparably sized co-op in the same neighborhood. This premium will fluctuate depending on the supply of new construction condominiums and the unique nature of each property. Furthermore, closing costs can be roughly 2% of the purchase price higher for condos vs co-ops. This is because condo buyers will have to pay a Mortgage Recording Tax of 2.05% of the loan amount plus title insurance, both of which are not necessary for co-op buyers. Title insurance can cost over $7,500 for the typical NYC home purchase. Since co-op apartments are not considered to be real property, they do not have physical titles nor are co-op apartment bank loans considered to be mortgages.
However, co-op sellers will typically pay more than condo sellers as many co-op boards will impose a flip tax of commonly 2% of the sale price. The proceeds of the flip tax are added to the building’s reserves and are a disincentive for co-op shareholders to move too often.
4. Coops have a Much More Rigorous Buyer Board Application and Approval Process
New York City’s co-ops are known to have strict financial and evasive disclosure requirements for purchasers. Almost all co-op purchase applications will require potential buyers to complete a REBNY Financial Statement to prove their financial net worth, debt to income ratio and financial liquidity. Documents which may be required include tax statements, bank returns and brokerage statements. In addition, most if not all co-op boards will require a set of personal and professional references for review. The reality is that even if you can comfortably afford the co-op apartment and also furnish the required documentation, there’s still a very real chance that your co-op purchase application may be rejected by the co-op board. The board has the right to reject you for any reason whatsoever with the exclusion of protected categories (race, creed, color, national origin, sex, age, disability, sexual orientation, marital status, citizenship, occupation or the existence of children) and the Board of Directors has no obligation to provide the reason for the rejection. As a result of this protected veil of secrecy, it is hard to prove that a rejection occurred because of discrimination.
Condos are much easier to purchase with no board interview or serious threat of rejection. Even though a condominium building may have a short application of some kind, it will be more of a formality and used for record-keeping purposes than anything else. A condo board may reject a purchaser by utilizing a “right of first refusal,” however this would require the condominium itself to purchase the unit at the same terms being proposed between the prospective buyer and seller. This “right to first refusal” is only rarely exercised in the event that a condominium can raise enough funds to purchase a unit that is being sold for a fire-sale price.
Furthermore, another factor buyers must consider when choosing between a condo and co-op in NYC is the ease of obtaining financing. NYC co-ops may force buyers to provide a significantly higher down payment of 20-50% compared to a condo which can be 10% or lower. If you are an investor, making a higher down payment will reduce your leverage and likely lower the return on your real estate investment.
5. Condo vs. Co-op monthly charges
Co-op shareholders are charged a monthly “maintenance” bill that includes both real estate taxes and common charges. This is in contrast to condo owners who pay common charges and real estate taxes separately. This makes sense as the co-op corporation owns the entire building and is thus responsible for paying the real estate taxes of all shareholders. Common charges go towards operating and maintaining the building (employee salaries, utilities, repairs and maintenance, etc.) and any excess will go towards the building’s reserve operating fund.
Co-op maintenance charges can be higher than condo monthly charges because some co-ops will have an outstanding mortgage on the entire building, or do not own the land the building sits on and must pay a “land lease.” For co-ops, a percentage of the monthly maintenance will be tax deductible just like a condo owner’s real estate taxes are tax deductible.
On occasion, both co-ops and condos may levy temporary “assessments” on its residents. This is an additional temporary monthly charge which is used to fund major renovations or updates to the apartment building. These charges may be one time, monthly or even quarterly until the assessment is fully raised.
6. Co-ops have stricter House Rules than condos
Co-op boards are widely known to have much more power over its residents than condo boards. The House Rules of a co-op will dictate much of a resident’s life in a co-op from noise regulation, visitors, pet policy, subletting to renovations. Co-op sublet policies are generally designed to discourage investor ownership and to encourage long term residency. As a result, many co-ops will only permit 1 or 2 years of subletting out of 5 years. Few co-ops will permit unlimited subletting, and few won’t permit subletting at all.
Condo and co-op boards are elected by the owners and shareholders, respectively. However, residents will often complain about “unfair” or “rigged” elections in New York City. Just be wary of what kind of board situation you’re walking into, as co-op boards will have an especially large degree of power over a shareholder’s life!
Co-op boards have more power than condo boards because they are technically the elected Board of Directors of a New York corporation that happens to own a building. They have the power to enforce the House Rules, approve or reject buyers and work with the building’s management company to maintain the co-op’s building.
Note: A co-op board of directors may have the right to force a shareholder to sell his or her apartment if the co-op board deems that a material violation of the House Rules has occurred!
Townhouses and Multi-family Properties in NYC
Townhouses and multi-family units are both real property and ownership is equivalent to a traditional, free-standing house in the suburbs. Townhouses are commonly “attached” meaning that they share exterior walls on both sides. Multi-family properties can be either attached, semi-attached or completely free-standing.
A townhouse is typically owned and lived in by one family. While there won’t be any common charges, maintenance or assessments, the owner will be responsible for the utilities, taxes, maintenance and upkeep of his building. While you won’t have to deal with a nosy board or any neighbors, you also won’t have a building management company or on site superintendent to call upon for help!
A multi-family property can be a townhouse or free standing property which has legally been sub-divided into separate units. Multi-family properties that have more than 4 units are typically considered commercial vs residential property.
Multi-family properties have been extremely popular in recent years, even among smaller “mom and pop” investors who have helped gentrify wide swaths of Brooklyn. Small investors sometimes occupy one unit and rent out the other units as a way to simplify building management. Even though tenants will be responsible for their own utilities and generally small fixes costing less than $50, you should understand that you’ll be responsible for major repairs and maintenance of the property. If you are an out of town small investor, please make sure you have a trusted representative on the ground!