After last week's look at the pros and cons of condos, it's time to take
a closer look at cooperatives, also known as co-ops.
Little distinguishes a condo from a cooperative when the two are merely
compared one next to the other. Both might be situated in nice
neighborhoods; both could have fairly sizeable living spaces; each might
have monthly fees in addition to mortgage payments-, and both could
represent tight-knit communities. So what's the difference between the two?
A condo owner owns the unit as an individual, and has common ownership of
the common elements of the condo building, such as the lobby and other
areas. A co-op owner, on the other hand, leases the unit from a corporation.
"A co-op building is owned by a corporation, but the people who live in
the building own the corporation," says Barry Moss, principal of Capital
City Appraisers. As such, the corporation's board of directors, which is
comprised of the residents (or owners) of the building, has a vested
interest in what happens to the building.
In fact, this single piece of the puzzle may be the largest difference
between condo and co-op ownership. Because the tenants actually own the
building and the corporation, they collectively have a greater say in the
quality of life available within their community. As a group (and through
their board), the co-op can determine who is permitted to live within the
community and by what rules they will have to abide.
Moss points out that - seen from the outside - this may seem snooty or
controlling. But it actually protects the tenants in several important ways.
For example, the board may choose not to admit a person who "doesn't have
the wherewithal to carry their share of the community's financial burden."
Barry described a scenario wherein a person who had inherited enough money
to buy into a condo or co-op might not necessarily have the income required
to handle the monthly fees. That person would be more likely to be accepted
into a condominium - even though she or he would be at risk of defaulting
several months later. A co-op board, however, might foresee the danger in
this scenario and vote not to allow the person in.
Another case, at least in D.C., where a co-op board might opt to protect
the interest of its members is when a prospective buyer might be of possible
"danger to the health and safety of other community members." For instance,
a political dignitary who requires round-the-clock security protection might
be denied co-op membership for that very reason.
So co-op owners can, if they desire, exercise a greater level of control
over the quality of life within their community than condo owners. And
though this is not always important to all people, it is an important
consideration. Similar to gun control laws, says Moss, where people have the
choice of living in a state like Texas, where gun control laws are minimal,
or Rhode Island, where the laws are more stringent, different people might
see these options differently. If you want to be sure that the people in
your community actually live there - not rent - a co-op might be a better
choice.
Another factor to take into account is that of acquiring financing.
Because lenders Fannie Mae and Freddie Mac often balk at providing loans
when a building falls above certain "investor ratios," cooperatives often
feel the brunt. An investor ratio where 65 percent of the tenants in the
building are renting and the remainder are owners leaves many lenders
feeling skittish. Skittish translates into reluctant. which means that loans
may be denied or given with less- than -favorable terms.
Add to that the fact that "not all lenders participate in the co-op
market." This from Dan Melman and Mary Jane Molik in their D.C. Cooperative
Home Report (www.danmelman.com) who add that "buyers who have often been
approved with one lender may end up having to use another. Lenders must have
a recognition agreement with the cooperative to secure the share loan."
To complicate things just a little more, Barry notes that "there are only
about a ten lenders who will deal with co-ops in the district - but many.
many more for condominiums."
Finally, co-ops tend be in older buildings and often contain elements
considered more charming than newer condominiums. If you like high ceilings,
hardwood floors. crown moldings, and large windows, you should look take a
look at co-ops. If you're looking for an investment property that you can
rent out to someone else, then stick with the condo or single-house route.
