Any fundamental reasons that a co-op would be cheaper than a condo?

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Ketawa
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Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Ketawa »

I live in downtown DC and my lease will be up for renewal in January. I have been here 3 years and am considering purchasing a home in the same neighborhood where I currently live, as my long-term situation is now stable. With the pandemic making city life temporarily less attractive and mortgage rates being insanely low, it also appears that there may be a buying opportunity this winter, so I'm doing my due diligence on a potential purchase. My neighborhood mostly consists of apartment buildings, with a sprinkling of condos and co-ops, and I'm hoping to stay in the same neighborhood. I have done some research and don't have a major issue with either type of ownership structure; I used to own a condo.

One thing I'm not understanding is why the nearby co-op would have drastically lower prices than nearby condos. It's not something like a 55+ co-op and the listings for it state there are no rental restrictions. I have no desire to be a landlord anyway. DC has a long history of having co-ops, although not on the scale of NYC, and most new construction is condos.

I'd be shopping for a 1 bedroom/1 bath or a small 2 bedroom. Here are some examples from studio to 2 bedroom with list prices since there are limited 1 bedroom listings.

Condos
Studio/1 bath, 644 sq ft, $440K, $683/sq ft, $340 HOA fees, built in 2009
Studio/1 bath, 546 sq ft, $400K, $732/sq ft, $289 HOA fees, built in 2020
Studio/1 bath, 575 sq ft, $465K, $809/sq ft, $515 HOA fees, built in 2019
1 bed/1 bath, 680 sq ft, $500K, $735/sq ft, $360 HOA fees, built in 2020
2 bed/2 bath, 1350 sq ft, $860K, $637/sq ft, $714 HOA fees, built in 2009
2 bed/2 bath, 1104 sq ft, $880K, $797/sq ft, $583 HOA fees, built in 2020
2 bed/2 bath, 1050 sq ft, $920K, $876/sq ft, $961 HOA fees, built in 2019
2 bed/2 bath, 880 sq ft, $789K, $897/sq ft, $826 HOA fees, built in 2019

Co-op (all in building built in 2006)
1 bed/1 bath, 682 sq ft, $382K, $560/sq ft, $403 HOA fees
1 bed/1 bath, 650 sq ft, $405K, $623/sq ft, $579 HOA fees (penthouse)
2 bed/1 bath, 823 sq ft, $495K, $601/sq ft, $400 HOA fees
2 bed/2 bath, 1027 sq ft, $560K, $545/sq ft, $461 HOA fees

The condos are around 20-30% more expensive, even compared to the older condo building. Maybe this is partially because the co-op doesn't have rooftop access, but I'd happily pay 20% less to forgo that amenity. There's nothing weird going on with the co-op list prices; they all include the underlying mortgage for each unit. I have a coworker who lives in the co-op and plan to ask her about her experience.

Are there fundamental reasons due to the ownership structure that a similar co-op would be substantially cheaper than a condo? Or is a difference of this magnitude more likely to be a sign of something fundamentally rotten with the building or management?
alex_686
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by alex_686 »

I can think of a couple of reasons. First, have you eliminated the non co-op reasons?

1. It may well be a difference in the buildings. Location, amenities, age, etc.

2. It may be tied to the reserve fund.

Now, on to the Co-Op

1. Any restrictions on selling? Does the board have to approve?

2. Does the board allow or limit mortgages? Can you get a mortgage? Not every bank will offer a mortgage on a condo.

3. Are people familiar with the nuances of co-ops? This could limit the selling, and thus the price.

4. How are the association fees distributed? The co-op might have to the pay the property taxes for the whole building. I have seen situations where this is determined by the square foot, so the garden level apartment pays as much property tax as the top floor.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
bsteiner
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by bsteiner »

Underlying mortgages on co-op buildings.

Lesser degree of marketability of co-op apartments.
luckyducky99
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by luckyducky99 »

I live in a co-op and researched this when I bought. Seems to boil down to a couple major things:

- Traditionally it's been much harder to get a mortgage, so the pool of buyers was limited to those with cash or alternative financing, which meant lower demand and they were harder to sell. This is starting to change now. I was able to get a mortgage through a major national lender.
- They're relatively uncommon and it's not truly real estate, which makes them seem "strange" to people so they shy away for behavioral reasons. I found this attitude applied to real estate agents as well -- it took me a couple tries to find an agent even willing to help me make and offer and buy the one that I wanted and now own.
- Depending on the location and building, getting board approval to purchase the shares or be granted the lease can be an actual hurdle. Where I live, it is not; it's just a formality.
- The terms of the proprietary lease can seem stringent/strange. Technically, I could be evicted from my own unit and forced to liquidate my shares or else forfeit them. This has happened in my building (before my time) but it was an extreme situation. I generally consider this part of the "co-ops are strange" fear mentioned above.

Make sure you understand the dues/rent structure for your building and what it does / doesn't cover (property taxes, utilities, common maintenance, master insurance, etc.). Some of these can be strange. For example, I pay the same rent for a top floor corner unit as someone living in the smaller back basement unit.

Edit: Also, renting them out is often forbidden or limited. Our building allows rentals only while paying increased dues, and for no more than 3 out of every 10 years. Make sure to read all the documentation thoroughly to understand the structure: co-op documents/bylaws, proprietary lease, anything else to understand any wrinkles.
Last edited by luckyducky99 on Mon Aug 03, 2020 10:59 pm, edited 2 times in total.
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Ketawa
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Ketawa »

My comments in red.
alex_686 wrote: Mon Aug 03, 2020 10:30 pm I can think of a couple of reasons. First, have you eliminated the non co-op reasons?

1. It may well be a difference in the buildings. Location, amenities, age, etc.

I don't think this is a major contributor, but I'll have to take a look at the units and common areas. The co-op is one block from where I live. One of the condo buildings is next door to my current building and is only 3 years newer than the co-op. Instead of the (standard for the area) rooftop pool, the co-op has a courtyard and an indoor pool and hot tub.

2. It may be tied to the reserve fund.

Could be, I'll have to investigate further.

Now, on to the Co-Op

1. Any restrictions on selling? Does the board have to approve?

There may be some restrictions on who can be approved to buy, but I don't think it would account for the massive difference. About 2.5% of the over 300 units were listed recently or are now.

2. Does the board allow or limit mortgages? Can you get a mortgage? Not every bank will offer a mortgage on a condo.

Mortgages are definitely allowed. Not expecting this to be an issue for me.

3. Are people familiar with the nuances of co-ops? This could limit the selling, and thus the price.

Possibly a contributor, but one I'd be happy to take advantage of.

4. How are the association fees distributed? The co-op might have to the pay the property taxes for the whole building. I have seen situations where this is determined by the square foot, so the garden level apartment pays as much property tax as the top floor.

Property taxes seem to be extremely low. They are paid through the HOA, but I didn't include them in the numbers in my OP. They are directly proportional to the HOA fee, about 30% more. Assuming there isn't some other property tax assessed, the annual total is about 0.35% of the list price of a unit, less than half the official rate in DC (0.85%). I read somewhere that this is common for co-ops because the assessed value of the entire building, which is how a co-op is assessed for property tax, is typically less than the values of the individual units.
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Ketawa
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Ketawa »

bsteiner wrote: Mon Aug 03, 2020 10:35 pm Underlying mortgages on co-op buildings.
I don't understand why this is a major issue, unless the co-op doesn't have a competitive interest rate. I'll have to investigate. Listings also include the underlying mortgage balance and payment. The underlying mortgage payment is around the same as for a 30 year loan at 3.125%.
bsteiner wrote: Mon Aug 03, 2020 10:35 pm Lesser degree of marketability of co-op apartments.
I suppose this limits the upside on price, but I'd be happy to pay a lower price at purchase and consume cheaper imputed rent for as long as I live there.
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Ketawa »

luckyducky99 wrote: Mon Aug 03, 2020 10:52 pm I live in a co-op and researched this when I bought. Seems to boil down to a couple major things:

- Traditionally it's been much harder to get a mortgage, so the pool of buyers was limited to those with cash or alternative financing, which meant lower demand and they were harder to sell. This is starting to change now. I was able to get a mortgage through a major national lender.
- They're relatively uncommon and it's not truly real estate, which makes them seem "strange" to people so they shy away for behavioral reasons. I found this attitude applied to real estate agents as well -- it took me a couple tries to find an agent even willing to help me make and offer and buy the one that I wanted and now own.
- Depending on the location and building, getting board approval to purchase the shares or be granted the lease can be an actual hurdle. Where I live, it is not; it's just a formality.
- The terms of the proprietary lease can seem stringent/strange. Technically, I could be evicted from my own unit and forced to liquidate my shares or else forfeit them. This has happened in my building (before my time) but it was an extreme situation. I generally consider this part of the "co-ops are strange" fear mentioned above.

Make sure you understand the dues/rent structure for your building and what it does / doesn't cover (property taxes, utilities, common maintenance, master insurance, etc.). Some of these can be strange. For example, I pay the same rent for a top floor corner unit as someone living in the smaller back basement unit.

Edit: Also, renting them out is often forbidden or limited. Our building allows rentals only while paying increased dues, and for no more than 3 out of every 10 years. Make sure to read all the documentation thoroughly to understand the structure: co-op documents/bylaws, proprietary lease, anything else to understand any wrinkles.
Good feedback, thanks!
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by brajalle »

Insurance was also mentioned. Specifically it's possible that your insurance costs could be different at each unit due to Master Policy terms/etc. Ie my condo policy was about $360/yr, my homeowners policy is about $1600/yr. Could be a source of some price premium.

I'd also consider long-term maintenance needs/funds. You should get an understanding of who is responsible for what as far as maintenance...including long-term capital projects. Roofing, siding, concrete work, water lines, sewer lines, windows, doors, etc. Here's an example - my small condo complex has cedar siding installed in 1980. Cedar siding generally has a lifetime of about 20 years - it's been 40 years. The fences & garages weren't stained when the building was last done (2012). The dues hit $100/mo in about 1984...and stayed there until about 2014 (when it finally wasn't enough income for basic annual expenses). We raised dues to cover expenses to $140/mo to stay positive and build some funds, and then in 2017 & 2018 raised them to actually fund the capital needs. There was no capital fund balance to cover our long-term needs because of past owners not raising dues. The driveway/concrete in the complex is starting to age, we've had water lines start to collapse, it's probably going to be a good idea for us to start inspecting the masonry (1st floor is stone) soon, etc. Anytime you're buying into any sort of association, condos, co-op, etc - it's a good idea to get a firm grasp of how well they're prepared for upcoming large expenses or emergencies. A (recently) former board member is likely the best source of information. In your example above, it's possible the co-op may have capital needs and no funds built up, and the condo association could be very well capitalized for upcoming needs. In the example of my condo association, we have about $10k/unit in our capital fund, whereas I know a condo association across town with similar long-term needs has $0 in their capital fund. Is this worthy of a price premium? It could be a reason. It could also be possible most people have no clue about this stuff until they go to a meeting.
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Faisal »

Having lived in NYC and looked at the difference between the significantly here is the basic difference between the two.

1. Condo - Freedom
2. Co-op - Limited freedom.

And this is what I mean. With a Condo you can make any changes to your apartment as you see fit, you can make lay out changes, make an alcove a bedroom and basically do as you please without a board of other other apt owners reviewing your decisions and then having the ability to veto them.

In a Co-op a board has to approve most if not all the major changes to your apartment. You have to be approved by the board, you have to follow all the rules established by the board even if you disagree with them and have little chance to change them unless you get on the board.

Also even though Co-ops are cheaper you have to pay a monthly HOA or maintenance fee to the coop. That is a mixture of taxes, cost for operating the building etc.

Then there is the issue of additional expenses and when the board decides to make some changes to the building, like new pipes a new hvac etc you end up paying for it in addition to your monthly maintenance and mortage.

Hope that helps.
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by michaeljc70 »

People have hit the major points: harder to finance, harder to sell (board must approve purchaser in most cases) and more restrictions. They typically have much higher dues/fees than condos (though you have to take into account property taxes are included in coops). I wouldn't touch one with a 10 foot pole. If the board for some reason want to, they can make it very hard for you to sell.
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by brajalle »

Faisal wrote: Tue Aug 04, 2020 3:28 am Having lived in NYC and looked at the difference between the significantly here is the basic difference between the two.

1. Condo - Freedom
2. Co-op - Limited freedom.

And this is what I mean. With a Condo you can make any changes to your apartment as you see fit, you can make lay out changes, make an alcove a bedroom and basically do as you please without a board of other other apt owners reviewing your decisions and then having the ability to veto them.

In a Co-op a board has to approve most if not all the major changes to your apartment. You have to be approved by the board, you have to follow all the rules established by the board even if you disagree with them and have little chance to change them unless you get on the board.

Also even though Co-ops are cheaper you have to pay a monthly HOA or maintenance fee to the coop. That is a mixture of taxes, cost for operating the building etc.

Then there is the issue of additional expenses and when the board decides to make some changes to the building, like new pipes a new hvac etc you end up paying for it in addition to your monthly maintenance and mortage.

Hope that helps.
To some extent, this depends completely on how the Condo association by-laws & declarations are written. It might also be slightly different in each state. In ours, you will not be doing anything that involves touching or modifying subfloor, drywall, masonry, support structures, insulation, wiring, plumbing, or ductwork without permission from the Board. If you don't do so, we could ask you to return those items to their prior condition. I believe we can also ask for a bond potentially once we approve a change. In addition, our Association could decide to change or replace or upgrade any of those items and charge an assessment - that's not unique to Co-ops. At least, that's how the rules are written. I don't think we (as a Condo association) can do anything about a HVAC system (minus the ductwork) - unless you weren't heating/cooling the place and it was potentially damaging something we are responsible for - I think we could fine you then, followed by placing a lien for anything unpaid then foreclosure, or just civil action to remedy. Actually, with notices sent, we might be able to replace/repair it for you and then place an assessment if damage was occurring or there was an adverse effect of some sort. We don't have many co-ops in our area - the only one I am aware of in our town actually functions more like an apartment complex with monthly rent - except the Co-Op board you help elect is the landlord.

These things can vary greatly. You won't know how unless you read specific documentation for each type of entity or unless your state has a very regimented template that is followed. Even then, it can vary a ton in practice in terms of how each entity operates & interprets what is in the rules. For example, in our condo association, even though our rules provided for the above things, in practice we were pretty easy-going. Don't touch any of the structural walls (ie the exterior shell & floor beams), hire a general contractor or make sure the work is decent. Ie - one lady was an interior designer & her brother did the work - they removed the interior walls & pantry between the kitchen and dining room and pretty much opened up the entire first floor. Technically that needed all sorts of approval, in practice we found out about it after the fact, it looked good, we didn't care they hadn't asked. You also generally could bring in an electrician, plumber, or HVAC people to do normal repairs, slight modifications (ie moving a light or adding a ceiling fan), or to replace/add something (ie HVAC replacement, add water softener, fireplace conversion to gas, etc) without notifying us. Of course, if there was a problem, that could get us involved, but we've yet to have that happen (I've been there 11 years out of 40). On the other hand, after persistent issues with the same people blocking parking, we tow pretty fast after walking down to talk to you a few times & we've also stopped dealing with tenants at all (a few of ours are rentals unfortunately). We also had to make a rule against bonfires - after some issues with large bonfires by one owner within spitting distance of decks, fences, and overhead trees (violating city ordinances on all of those things in addition to distance from the building).
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Ketawa
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Ketawa »

I talked to my coworker who owns a unit in the co-op, and she did not have any major concerns with the management or building. It sounded like a pretty typical homeowning experience. Units are regularly sold or approved to rent out without any issues.

As mentioned in this thread, I have noticed that financing will be more difficult. My preferred lenders like NFCU and Third Federal do not offer financing for co-ops. Ideally, I want a 3- or 5-year ARM. If I can't get the low rate of an ARM, a more expensive condo may actually make sense.

At any rate, I have many months to monitor the market in my neighborhood before I make a decision.
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Ketawa »

luckyducky99 wrote: Mon Aug 03, 2020 10:52 pm - Traditionally it's been much harder to get a mortgage, so the pool of buyers was limited to those with cash or alternative financing, which meant lower demand and they were harder to sell. This is starting to change now. I was able to get a mortgage through a major national lender.
Which lender did you use?
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Steelersfan »

Those HOA fees are opposite of what I see in my area. Co-op HOA fees include property taxes so are higher than for comparable condo units since condo owners pay property taxes themselves. Maybe there's something unique about how units are taxed where you live.
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by Ketawa »

Steelersfan wrote: Wed Aug 05, 2020 12:35 pm Those HOA fees are opposite of what I see in my area. Co-op HOA fees include property taxes so are higher than for comparable condo units since condo owners pay property taxes themselves. Maybe there's something unique about how units are taxed where you live.
I did not list the full HOA fees, which would add on property taxes and payment for the underlying mortgage. That comparison would be mostly useless. I only listed the portion of the HOA fee that is related to common services.
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Re: Any fundamental reasons that a co-op would be cheaper than a condo?

Post by luckyducky99 »

Ketawa wrote: Wed Aug 05, 2020 11:30 am
luckyducky99 wrote: Mon Aug 03, 2020 10:52 pm - Traditionally it's been much harder to get a mortgage, so the pool of buyers was limited to those with cash or alternative financing, which meant lower demand and they were harder to sell. This is starting to change now. I was able to get a mortgage through a major national lender.
Which lender did you use?
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