Shared Ownership Housing: Condos, HOAs, and Co-Ops

Shared Ownership Housing: What's the Difference?

Condos, HOAs, and Co-Ops
Part I

Condominiums, Homeowners Associations, and Cooperatives are all forms of shared real estate ownership.  From a living standpoint, these three entities may appear to be the same.  But from a legal standpoint, there are significant differences between condos, co-ops, and HOAs.  Today, we're continuing our series on Real Estate Law by discussing these differences.  It is important to understand the differences BEFORE investing in any one of these forms of property ownership.

What is Shared Ownership Housing?

There are many types of real property available today.  There are apartments, single family detached houses, townhouses, duplexes, condominiums, cooperatives, cabins, mobile homes, and prefabricated units.  With the exception of the single family detached house, many forms of housing today involve some form of shared ownership. And today, you'll find many detached houses are also a part of an association, especially in newer developments. As you enter many subdivisions, you will see signs that say "a deed restricted community,"  indicating some form of shared ownership housing is in effect.  

In a typical subdivision, there are streets and sidewalks.  There may also be parks or other types of green space, playgrounds, pools, trails, or tennis courts.  These may be open to the general public, or their use may be restricted to those that live in that community.  If the use is restricted at all, chances are, the subdivision employs some sort of shared ownership.  Those elements are owned, paid for, and maintained by those who share in their use.

Conversely, if amenities are for public use, chances are they are owned and maintained by the local government, funded through local taxes.  Even though they might require a "resident pass," they are publicly owned.  If the City oversees the amenities, chances are they are NOT a part of a shared ownership community.

Shared ownership housing is typically controlled by a Board of Directors.  There are documents that define who owns what, and there are bylaws and regulations by which all owners must abide.  There are generally monthly or quarterly fees that all owners must pay.  These fees pay for maintenance and insurance of the shared areas.

Currently, in the United States there are three common types of shared ownership housing: Cooperatives (commonly called co-ops), Condominiums (commonly called condos), and Homeowner Associations (referred to as HOAs).  All three can be made up of a wide variety of property types. They may be residential or commercial in nature.  But there are some significant legal differences amongst the three types of property.  It is important to know the differences BEFORE you buy in.

What is a Homeowners Association (HOA)?

A Homeowners Association (HOA) is an entity made up of homeowners within a defined area.  This area is defined within the Homeowners Association Documents.  These documents also contain the bylaws, covenants, restrictions, and rules by which all members must abide.  The Association itself is generally a Non-Profit Corporation.  

Each owner buys a lot (or lots) within the defined area.  That lot may or may not include building(s). If the lot is unimproved, all improvements must follow the guidelines and restrictions set in the Association documents. The individual owns, maintains, and insures everything on that lot.  And when the person buys into the Association, he pledges to uphold all guidelines and restrictions contained within the HOA documents.

The Association itself is governed by a Board of Directors, elected by the members of the Association.  This Board is responsible for upholding all of the covenants, restrictions, and regulations contained in the documents.  

Most HOAs also contain some common elements.  Those elements are owned in their entirety by the HOA.  Lot owners own no shared interest in those common elements.  They just have a right to enjoy their use, as dictated by the HOA itself, and as defined in the HOA documents.  Depending on the development, common elements may be restricted to things like roadways, sidewalks, and mailbox stations, or they may include things like swimming pools, playgrounds, and barbecues.  

All owners are responsible for paying monthly fees to the Association.  Those fees cover maintaining, improving, and insuring the common elements.  Individuals are responsible for paying to maintain, insure, and improve their own lots in addition to paying the HOA Fees.  Some HOAs include general landscaping maintenance on the individual lots; in others, lot owners are responsible for maintaining their own yards, including cutting any grass.

Although many HOAs consist only of single-family detached homes, others consist of a variety of structures.  Some townhouse communities are a part of a Homeowner's Association.  In addition, many office parks have adapted an HOA model, where an individual owns both the office building and the land on which it sits.  

Owners in an HOA own individual parcels of real property, each with its own individual parcel number.  They are responsible for individually paying all property taxes on their lots, as well as paying their share of taxes for common elements.  (Taxes on common elements are figured into the monthly HOA fees, rather than being individually assessed.)  And although they are governed according to the documents, those documents do not get recorded.

With an HOA, the Association owns all common elements in their entirety; lot owners do NOT own a share of common grounds.  And the HOA Board may restrict the usage of these common elements. If a member is derelict in paying any fees or fines, his rights to common elements may be suspended. 

HOAs are generally governed by State Statute, and the statute supersedes what is written in the HOA Documents.  An HOA is subject to all provisions of the Fair Housing Act.  Your purchase application may need to be approved by the Board of Directors, but generally can only be rejected for financial reasons, (i.e. you do not appear to have the financial resources to pay the Association fees.)

What is a Condominium (Condo)?

With a condominium, an individual owns a particular unit within a larger complex.  That unit may be a townhouse, a half duplex, an apartment, or even a mobile home.  However, one does not own the land underneath the building, or even the building itself.  (There are some exceptions to this, which will be discussed later.)  Typically in a condo, one owns "from the drywall in."  The land itself and all improvements typically are owned by the Condo Association.  The unit owner is responsible for insuring and maintaining everything within the walls of the unit; the Condo Association is responsible for insuring and maintaining everything it owns.

The specifics of what a unit owner owns and maintains, versus what the Association owns and maintains, is outlined in the Condominium Documents.  Like with an HOA, these documents also contain the Covenants, Restrictions, and Bylaws for using your property, as well as the common elements.

In some states, a condo may be platted as a "Land Condo."  In those instances, the Association only owns the land; the parcel owner owns the actual building and all improvements.  In these cases, the parcel owner has a higher maintenance and insurance obligation.  In other cases, the Condo documents push maintenance responsibility on to the owner.  It is important to read the Condo documents BEFORE finalizing a purchase, so that you understand how much of a maintenance obligation your condo requires.  

In a Condo Association, each owner actually owns a share of the common elements, including the actual building, the grounds, any shared utility connections, and any amenities, such as a pool, a playground, or green space.  All of these are actually administered by the Board of Directors.  The Association also handles maintenance of the grounds, including landscaping and mowing grass.  

With a condo, although you may not own an actual building, you DO own a piece of Real Property.  You are able to build equity, just as you are with non-shared ownership housing. Each parcel in the condominium has an individual parcel number, recorded in the property database.  Every individual owner is responsible for paying property taxes on their parcel(s).  Each also pays his/her share of the taxes on the common grounds.  The Condo Documents define each owner's share.  Some condos define shares according to unit size, with larger units having a larger share and a larger financial burden.  Others split the common grounds into equal shares, regardless of the individual unit size.  In this case, all owners have an equivalent share of all common grounds and amenities, and all pay equally.

Like with an HOA, Condos are governed by a Board of Directors, elected by the members of the Association.  Most states also have statutes specific to condos, and those statutes supersede anything contained in the Condo Documents.  

Condo Associations usually maintain all roadways, sidewalks, etc. within the community.  Many also cover things like trash collection and recycling.  And of course, Association Members are responsible for paying monthly fees to cover all of these costs.  Should unexpected issues arise, the Board may impose a "special assessment" to pay for these issues.  These are in addition to the regular fees, also called "assessments: in condo lingo.  Each parcel owner is responsible for paying his share, as outlined in the Condo documents.

Condominiums often have two types of common elements: General Common Elements (GCEs) and Limited Common Elements (LCEs.)  Limited common elements are only available to a selected group of owners, while General common elements are equally available for use by any of the members of the Association.  Things such as parking spaces, balconies, patios, and car ports are generally Limited Common Elements.  Often, the financial burden for limited common elements falls to an individual owner, rather than to the Association as a whole.  The Board may demand you maintain a limited common element, and if you fail to do so, they can perform the work themselves and bill it to the parcel owner.  If the parcel owner fails to pay, the Association may put a lien on the unit.

Condos are governed by what is in their documents.  And unlike with an HOA, these documents are recorded in the property database.  They become public record.Statutes are generally more stringent as to what these documents may restrict.  These documents also outline dispute resolution procedures for when an owner disagrees with the Board's interpretation of the documents.

Condos generally have some sort of screening process for prospective owners.  This process is usually more rigorous than with an HOA, and prospective owners may be rejected for a broader number of reasons.  Many Associations perform background and credit checks on prospective owners.  State statute and the Fair Housing Act define what a condo may or may not consider.  

What is a Cooperative (Co-Op)?

A Cooperative differs significantly from an HOA or a Condominium. Rather than owning a piece of "real property," an individual owns a share in a corporation or LLC.  This share gives the owner the right to lease a certain space in the building.  Legally, this is considered a piece of "intangible personal property," rather than an actual piece of real estate.  With a co-op, all buildings, improvements, and amenities are owned by the corporation, and you are buying shares in a corporation.  Usually larger shares mean the right to lease a larger unit, while smaller shares give you the right to lease a smaller unit.

Because you are not buying real estate in the eyes of the law, you do not build equity like you do in an HOA or Condo.  Co-op purchases generally cannot be financed with traditional mortgages either, but must be financed through other types of loans.  And because you own shares, rather than physical property, they pass to heirs a little differently as well.  Heirs inherit shares, just as if you left them 100 shares of Microsoft Corporation.  Legal structures such as "joint tenants with right of survivorship" are more difficult to set up.  And because you do not own actual property, you may not put your co-op shares into a Land Trust.  However, you can make them a part of a different type of trust arrangement.

Like with an HOA or Condo, the Co-Op is administered by an elected Board of Directors.  However, most co-ops have active membership meetings, and the individual shareholders have a far greater say in how the co-op is run.  More actions require a group vote, and generally more members are active in a Co-Op than in any other form of shared ownership housing.

Co-Ops are also governed according to the documents.  Ownership requires a pledge to abide by all of the covenants, rules, restrictions, and bylaws.  But unlike with Condos and HOAs, most states do NOT have statutes specific to Co-Ops.  Co-Op members are freer to apply rules and restrictions to any area the majority of owners agrees.  They have more flexibility as to what they can allow and prohibit.

Co-ops generally have a smaller buy-in commitment than do Condos or HOAs.  This is because you are only buying a share in the building, rather than buying an actual piece of the building.  However, they also have higher monthly obligations.  In a co-op, your monthly payment must include rent for your unit, in addition to monthly costs associated with maintenance and improvement.  .  Your monthly fee also covers your share of mortgage payments and taxes.  (Many co-ops do not own the building they are sharing outright; instead, each share also includes a share of the mortgage on the actual building.)

And although Co-op ownership is subject to the Fair Housing Act, co-ops have the most rigorous screening process of the three types of shared ownership housing.  Purchasing a co-op share almost always involves a background and credit check, as well as an interview in front of the Board and/or a Member Committee.  Because the co-ops have the most leeway, they reject far more applications than do HOAs or Condos.  Again, this is because you are buying into a partnership, rather than just buying a place to live.

Because of this, co-ops have fewer investors and more owner-occupied units than a typical HOA or Condo.  Many Co-Ops have leasing restrictions, and may require a tenant pass the same rigorous screening as an owner.  This can be highly beneficial when you are looking for a place to call home. However, this can be a huge drawback to an investor looking to diversify or expand his housing portfolio.

Co-ops are more often found in urban type areas, and can be great alternatives to renting an apartment.  However, owning a Co-Op unit greatly differs from owning a piece of real property.  But a co-op is great for a person looking for a small community in a large area,  Co-Op dwellers generally know their neighbors.  Many co-ops have amenities and social aspects not found in other communities.  And they probably involve the most "sharing" of any of the three types of shared-ownership housing.

Pros and Cons of Condos vs. Co-Ops vs. HOAs

This week, we looked at three types of shared-ownership housing: Condominiums, Homeowner's Associations, and Cooperatives.  We discussed the basics of each type of housing, as well as their legal definitions.  Part II of this article will discuss the pros and cons of each type.  We'll also discuss how co-ops, condos, and HOA units may fit into a Real Estate Investment strategy.

Here at the Law Offices of Heath D Harte, we believe that a property should fit its owner.  There are some wonderful elements of shared ownership housing, as well as some limitations.  We want all of our clients to be informed, and to find the best match for their needs.  As well as handling purchases and closings, we have helped individuals with issues that arise AFTER they are settled into their property.  We've seen people buy into shared ownership housing that was a poor fit from the start. This is why we want everyone to be informed BEFORE they buy.

We'd love to hear our readers' experiences with co-ops, condos, and HOA.  We'd love to hear the good stories and the bad.  We invite you to share via Facebook, Twitter, Google+, or by the comment section of this post.  You can also contact us with your stories through our website.  And of course, we hope you'll be back for the second part of this article.  (Subscribe to this blog using the link in the sidebar, or join us on Facebook, Google+, or Twitter to receive notifications for Part II of this post.)