The Nuances of Buying a Manhattan Co-op versus a Manhattan Condo

Co-ops

First, what is a Co-op? Short for co-operative, the concept of a co-op is a phenomenon that has been around for decades, mainly limited to the borough of Manhattan. In New York City, approximately 70 to 75% of all apartments available for purchase (and close to all pre-war apartments) are in co-operative buildings. These co-ops are owned by an apartment corporation. Hence, when you buy a co-op in a co-op building, you are actually buying shares of the corporation, which entitles the buyer or in this case, the shareholder, to a proprietary lease, authorizing the lessee exclusive use of an apartment in the building.

Essentially, unlike buying a house or a condo, you do not actually own your apartment. You own shares of the apartment corporation that owns the co-op building. The bigger your apartment, the more shares of the corporation you own. Shareholders contribute a monthly carrying charge (often called a monthly maintenance fee) to cover building expenses, which covers heat, hot water, insurance, real estate taxes, and staff salaries among other things.

Co-op Pros

Compared to condos, they are generally less expensive. A recent NY Times article noted that with all things being equal, “the value of a condo is about 9% more than the value of a co-op.” Others have suggested that the figure for entirely equivalent properties could be as high as 30%.

Additionally, the real estate tax portion of the monthly maintenance fees is tax deductible.

The Nuances

Prospective buyers must be approved by a co-op Board of Directors. The approval process is often time-consuming, tedious and rigorous, requiring detailed information regarding the finances and background of the buyer.

The Board of Directors can determine how much of the purchase price can be financed and usually require higher down payments than condos.

As the monthly maintenance fee paid includes the underlying mortgage for the co-op building, the fees are generally higher for co-ops than for condos. Nonetheless, with regards to the underlying mortgage, the amount attributable to each unit is tax deductible. Some co-ops do not have an underlying mortgage, but a vast majority of them do. On the flip side, some condos may also have underlying mortgages.

Another distinction between co-ops and condos is that many co-ops limit or forbid subletting. Each co-op building has its own set of rules regarding these limitations.

Condos

The other 25 to 30% of apartments available for purchase in New York City are mainly condos, short for condominiums. These are becoming more popular and new construction is almost entirely condos. Like buying a house, condos are considered “real” properties. Buyers get a deed instead of stocks in a corporation.

Condo Pros

Condos come with more flexibility as you can finance up to 90% of the purchase price and sublet them without restriction.

There is no need to go through any sort of Board approval process when buying a condo.

Monthly maintenance fees are lower for condos as the fee does not include an underlying mortgage for a condo building. However, in this case, real estate taxes (usually paid annually) are not included in the monthly maintenance fee. This means that condo fees are not necessarily lower when you factor in the fact that real estate taxes are a separate payment that must be made.

The Nuances

As mentioned before, condos are generally more expensive.

Unlike co-ops, the monthly maintenance fees are not tax-deductible, but the real estate tax paid separately is.

Options are limited as there are way fewer condos than co-ops in the city.

Co-ops or Condos?

Overall, condos may be more attractive to buyers who want more flexibility in terms of financing and subletting, keeping in mind that they are usually more expensive and limited in supply. Co-ops, on the other hand may be more attractive to buyers who really just want to buy an apartment to live in, and do not mind going through the arduous Board approval process for a generally less expensive apartment.

Compare mortgage rates for New York here. See this article for more tips on getting a mortgage for New York co-op.