Lessons from the Pros

Real Estate

Condo on the West Coast? Co-op on the East Coast? What are the Differences?

Condominiums (condo) and Cooperatives (co-op) are often confused by the general public as being the same thing, but they are not. As far as living standards go, there are relatively few differences. The real differences exist from a legal and financing point of view.

Let’s start by defining them both.

Condominium – An apartment house, office building, or other multiple-unit complex, the units of which are individually owned, each owner receiving a recordable deed to the individual unit purchased, including the right to sell, mortgage, etc., that unit and sharing in joint ownership of any common grounds, passageways, etc. (dictionary.com)

Co-operative – A building owned and managed by a corporation in which shares are sold, entitling the shareholders to occupy individual units (like apartments) in the building. (dictionary.com)

In simple terms – if you own a Condo, you actually own your entire unit as well as a percentage of the common areas.  If you own a Co-op, you are a shareholder and you don’t own the unit.

The Co-op is managed and governed by an association.  This association is usually a corporation consisting of all the owners as shareholders.  Management, lifestyle and financial details are made by the Co-op association – either by a vote of each owner/shareholder or by delegation of an elected board of directors. The board often runs the day-to-day operations of the Co-op.

This sounds complex but in reality it can be very desirable.  Co-op residents generally get the same tax treatment as homeowners.

One of the most important distinctions between a Condo and Co-op is that in a Co-op a prospective purchaser must be approved by a membership committee (composed of current Co-op owners).  The approval process allows the committee to approve or reject a potential purchaser.  There are two legally based reasons a potential purchaser can be rejected: for not meeting the financial requirements established by the board or unwillingness/ability to comply with the operational rules.  Applicants can’t legally be rejected for reason such as age, sex, race, sexual preference or religion.

It has only been since the mid 1980’s that financing for Co-ops has become easily available. It is referred to as “share loan financing.”

One of the other big differences between Condos and Co-ops is how their rules are set and enforced.  Condos are governed by the applicable law in the local jurisdiction and its CC&Rs (Covenants, Conditions and Restrictions).  Co-ops have few substantive statutes that govern or regulate the association. They are only regulated by their operation document such as Articles of Incorporation, Bylaws, House Rules and so on.

Co-ops typically have a larger percentage of owner occupied units.  Many more Co-ops specifically prohibit renting out of apartments.  The CC & Rs of a condo will state its rules about the percentage of ownership versus rentals, so it can vary greatly.

The title of this article is “Condo on the West Coast”, “Co-op on the East Coast”, why did I make that statement?   Of course there are condos and co-ops on both coasts; however the laws that allowed condos didn’t even exist until the 1960’s and not in every state until 1969.  So it makes sense that as the west continued to build and expand they would use this new ownership model.  Whereas the east coast found it difficult to convert old buildings to this new model so even as newly constructed buildings were built  the established co-op model has been continued to be used.

Hope to see you in real estate class.

Great Fortune,

Diana Hill – dhill@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.