Condo versus Co-op - what's the difference?

[Porsche-O-Phile]

Any RE experts know the specific/legal differences between a co-op property and a conventional condominium property?

I found an intriguing property yesterday that's part of a co-op, which pays all the property tax (at least for now, but supposedly there's some talk of changing the co-op over to a condiminium format in the future, which I see as an opportunity to gain some value in an otherwise declining market).

Any specific things to ask/research/watch out for with a deal like this? TIA.

[the]

Condo, co-op, whatever, it doesn't matter. Cal has not even really begun to have the bubble deflate (although I saw some numbers showing certain hot zip codes actual sales are down 30% YoY as of right now). And when it hits, condos/co-ops/whatevers/anything other than SFR/ are going to get hit the hardest. They always do.

You're still at least 2 years too early.

[Porsche-O-Phile]

Counterpoint:

Well, it's just a thought but I've got a few reasons for looking now.

I've been kind of bearish about the market out here for some time and FWIW I do agree that there's going to be some continued decline and a certain amount of volatility for a while. That said, there's some other factors to consider:

1. Timing. As time moves along, overall RE prices may dip a bit, but lending standards are also going to get a lot tighter. We're already starting to see that. People in my situation that haven't been owners, don't have equity built up and don't have tens of thousands of dollars sitting around will continue to be shut out of the market - not by price (as was the case until now), but because they won't be able to get financed. Estimates of how tough the lending standards will get run the gamut and are anyone's guess, but one could foreseeably see a situation a few years from now where a person without 20% down cash, full closing costs in advance and an 800+ credit score will get the door slammed in their face in certain markets. I'd love to be the guy with the $100,000 in the bank and the 800 FICO at that time, but that's dreaming. As such, I need to monitor both trends and try to get in when I think I'm close to the intersection point of both on a graph versus time.

2. Market resilience. I'm certainly no believer in the "there's no bubble" or "this time's different" nonsense promulgated by the NAR and their puppets. There most certainly IS a bubble and this time is NOT different. However, certain markets (including SoCal) have shown extrordinary resilience to the flattening/declining trends that are massacring a lot of other markets. Certainly things are flattening and declining a little here now too, but not NEARLY at the rates of some of the other "rapid growth" sectors from a couple of years ago. Part of the reason is likely that SoCal is a very attractive place to live and not just for U.S. citizens. There are THOUSANDS of homes that have been/are being sold to Asian immigrants and other people from other parts of the world. It's not just domestically-earned dollars that are propping up this market, there's a lot of influx of foreign money too. As such, for as long as the ROW finds this area desirable, they'll continue to come here, bolster demand and keep prices a tad more resilient than other, less desirable areas of the country (from a global market perspective) might be.

3. Rent/purchase gap. At present, a bit of a weird thing has happened. There is a fairly sizeable gap (25% or more) between a rent payment on a particular property and the corresponding mortgage payment on it. This has a lot of implications including renters (like me) being "stuck" and shut out of the RE market to date (it's really only been great for those that already owned). Also, it means that people wanting to buy larger, multi-family units or rental properties simply can't make the numbers work to justify it (I've looked at several and there's simply no way to make the math pencil out - the rents won't cover the mortgage. Ever.) Over time, I see rental prices creeping up while mortgage/prices to buy slide down a bit, closing this gap. As such, the way I look at it - I'm eventually going to be paying $X,XXX a month to live here regardless. It's my choice whether I want to spend it on a rent payment or a mortgage payment given the choices I make now. It'll end up costing the same amount to put the roof over your head in a couple of years either way, so why not get SOMETHING for it?

4. Historical performance. Bubble, decline, recession, whatever. If you hold RE long enough, especially here - you WILL make money on it.

Those are some of the reasons I'm looking now.

[Big Ed]

In a condo, there is a master deed which describes the project and all the common areas. When you buy a unit, you buy a unit deed granting you specific ownership of your unit and a % interest in the shared common areas.

In a coop, all the units are owned as a legal entity (I think usually a corporation). You buy a share of that entity, which grants you exclusive use to the unit you will "own".

The difference is more legalese than anything, your ownership experience would tend to be similar in either.

[Big Ed]

And also to your original post....the coop would be responsible for paying the property taxes, but don't think for a second that they aren't billing the shareholders for that. There's no free lunch...although the coop *may* be overfunded at the moment so the owners have in effect, prepaid that tax.

Changing from a coop to a condo will not impact the market value of a unit in the least. Not a reason to buy. Make sure it is otherwise a sound investment.

[Porsche-O-Phile]

OK thanks. I figured as much WRT the property taxes although I'd heard some (questionable) advice that the conversion from co-op to condo would drive up prices. I spent some time digging around online today and I tend to agree with you - I don't see any difference in the pricing of one versus the other, so I won't use that to influence my decision. Thanks for validating this. . .

[alf]

A nice article with the same title as your post...

http://news.yahoo.com/s/fool/20070301/bs_fool_fool/117275354701

[Rick Lee]

Jeff, co-ops can be tough to find mortgages for. Sure, there are companies out there who do them. But they can charge a premium for it. Condo loans can be very tough too due to investor vs. owner occupied ratios in a given complex. But co-ops are a whole 'nother can of worms. The only co-op I know of in the NoVA area is a bldg. in Arlington that has a 99 year lease on it. Co-op boards can interview and reject you much like a country club can. And imagine if you were trying to get out of your co-op withing 3-5 yrs. of the lease or blanket mortgage coming up for renewal. I think it's just a big PITA.

[jyl]

P-O-P, this is kind of off topic but in the 1999 SoCal RE bust I saw the worst damage done to condos. Because they're all the same, basically, and the condo developer will do anything to move his unsold units, which crushes values for the individual owner trying to sell his condo. Why buy from Mr Individual when you can buy a brand new unit from the developer, with all kinds of perks and financing help that Mr Individual can't touch? Given where we are in the RE cycle, I'd be extremely wary of buying a condo. I know you're as skeptical as anyone, so probably no need for this post.