Co-op vs condo: what you actually own

What you own

Condo. You own your unit as real property, with a deed recorded in your name, plus an undivided interest in the common elements, such as hallways, roofs and grounds. A condominium association, run by a board of owners, manages the shared parts and collects dues.

Co-op. Fannie Mae describes a co-op project as one where a corporation holds title to the property and each owner holds shares in the corporation, along with a proprietary lease giving the right to occupy a specific unit. You do not receive a deed to your unit. The corporation, run by a board elected by shareholders, owns and manages the building.

Some buildings combine features of both. Fannie Mae's co-op rules mention "condop" projects, which have their own eligibility requirements. Ask exactly what is being sold.

Financing

Condo. Condo units are financed with ordinary mortgages, but the lender must also review the project. Depending on the loan, the lender may run a limited or full review, often using Fannie Mae's Form 1076 questionnaire. FHA loans require the project to be FHA-approved or meet single-unit approval rules; HUD has a searchable list.

Co-op. A co-op purchase is financed with a share loan secured by your shares and lease rather than by real estate. Fannie Mae buys co-op share loans only from lenders specially approved to sell them, and the project must qualify as a cooperative housing corporation under Section 216 of the Internal Revenue Code. Lenders typically gather project information on Fannie Mae's Form 1074. In practice, fewer lenders offer co-op financing, and some co-ops set their own limits on how much you may finance.

Monthly charges

Condo. You pay HOA dues for shared expenses and reserves. You also pay your own property tax bill and, usually, your own mortgage.

Co-op. You pay a monthly maintenance charge to the corporation. Because the corporation owns the building, that charge often includes your share of the building's property taxes and, if the building has one, the payments on the corporation's underlying mortgage, in addition to operating costs and reserves. You also pay your own share loan, if you have one. A co-op's monthly charge can therefore look high next to condo dues while covering costs a condo owner pays separately.

Taxes

Condo owners receive their own property tax bills and can deduct them if they itemize. For co-ops, IRS Publication 530 explains that a tenant-stockholder can generally deduct a share of the real estate taxes the corporation pays: divide your shares by the total shares outstanding and multiply by the corporation's deductible taxes. The corporation usually reports your share.

Approvals and rules

Both condos and co-ops have rules on things like pets, renovations and rentals. Co-ops often go further. Many require board approval of new shareholders under their governing documents, with an application, financial disclosures and sometimes an interview. Co-op rules may also restrict subletting and set a fee when you sell. Read the proprietary lease, bylaws and house rules before you sign a contract, and ask how long approvals usually take.

What to check for either

• The budget, financial statements and reserve information.
• Any special assessments, planned major projects or litigation.
• Insurance coverage for the building.
• For a co-op, the underlying mortgage on the building, its terms and when it comes due.
• Rental and sale restrictions that could affect you later.

An attorney who handles co-op and condo transactions can explain the documents and your rights.

The bottom line

A condo gives you a deed to your unit and a share of common areas; a co-op gives you shares in the corporation that owns the building and a lease on your unit. Co-ops usually mean share loans, fewer lenders, board approval and a maintenance charge that includes building taxes and debt. Compare total monthly costs and read the governing documents before choosing.