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Condo or Co-op?

There's an unusual real estate proposition often encountered by young, hip urbanites looking for their first stake in real estate: instead of purchasing a condominium, why not buy a share of a cooperative building?

Condos and co-ops (as they're popularly known) share a lot of common attributes. In both cases, the buyer lives in an apartment and turns all of the building maintenance over to someone else. It's one of the major perks of opting out of the white-picket-fenced family home. You don't have to cut the grass.

Unless you live in New York City, co-ops can be relatively uncommon. Here's the difference between them and their condominium cousins.

When you purchase a condominium, you own that unit. You also get the rights to use the exercise room, the party room, or any other common areas. When you buy into a co-op, you don't own any of the building's real estate. Instead, you own shares or a membership in the cooperative housing corporation. The corporation owns the real estate.

The National Association of Housing Cooperatives says there are two types of co-ops that allow you to build home equity just like a conventional real estate owner. In one, a market-rate housing cooperative, you buy and sell your membership or shares at whatever price the market will bear. In this case, a co-op can be virtually indistinguishable from a condominium.

A limited-equity housing cooperative, however, imposes restrictions on what you can get for the sale of your shares. Sometimes members impose those limits on themselves. Sometimes they have been leveled because the co-op benefited from programs designed to promote affordable housing, like below-market interest rate mortgages, grants, or real estate tax abatement.

Like a condo, you'll pay a monthly fee. In the case of a condo, that will cover your share of operations and maintenance. It will probably also include the co-op mortgage, property taxes, insurance, and utilities.

If that sounds like more red tape than you want to handle, consider that one of the perks of cooperative housing is that it can often be less costly than a condominium. You'll also get the regular tax benefits -- deductions for real estate taxes and mortgage interest -- that come with homeownership.

Co-ops do, however, come with some unique characteristics.

A co-op is run by a board of directors, who will pick through your finances and other aspects of your life to make sure you're a suitable tenant. This can be an intensive process, so talk to some current owners to find out what you can expect. You'll also want to scrutinize the rules and regulations for that particular building, lest you find out too late that you can't move in with your three chihuahuas.

For this reason, selling your co-op could be something of a hassle because the board will be interviewing and scrutinizing your prospective buyers. Buyers will also have to decide whether they can live with the building's rules. If you're planning on settling for a long time, this may be less of a concern.

Because co-ops have an unconventional ownership system, it may be harder to find financing to purchase your share. The board also may have rules for down payments, which you'll probably find less flexible than some mortgage lenders.

And, because all the expenses are jointly shared, everyone shares liability. In the rare case that an owner defaults, it will be up to the other owners to cover those expenses.

There's lots more about the differences between co-ops and condos, fixed-rate and adjustable-rate mortgages, and other housing matters in the Home Center. If you'd like help and insight from your fellow Fools, we also have a discussion board dedicated to homebuying matters.

Fool contributor Mary Dalrymple sometimes wishes her housing could be more cooperative. She welcomes your feedback. The Motley Fool has a disclosure policy.


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