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

Shared Ownership Housing: What's the Difference?

Condos, HOAs, and Co-Ops

Part II

Last week, we defined the differences between a Cooperative (Co-Op), a Condominium (Condo), and a Homeowner's Association (HOA).  This week, we'll compare and contrast each housing model, as well as discuss the pros and cons.

Condo vs. HOA

Similarities:

• Both are real estate purchases;
• Both can be a part of a Land Trust;
• Both are financed through Traditional Mortgages;
• Owners are responsible for paying property tax;
• Both are run by an elected Board of Directors, comprised of members of the Association;
• Both involve monthly fees to pay for insurance, maintenance, and upkeep of common areas.
• Both generally utilize "special assessments" to charge owners for unanticipated expenses.
• Both often include amenities not commonly found in single unit communities, such as pools, playgrounds, tennis courts, etc.
• Both are administered according to "the documents," which contain covenants, restrictions, rules, and guidelines for unit use.
• Both generally regulate the outer appearance of a unit.
• Both generally allow the Board to levy fines for noncompliance with any aspect of the documents.

Differences:

• With a condo, one generally owns "from the drywall in."  With an HOA, one typically owns the building, utility hook ups, land beneath the building, and the air space above.
• Generally, owner maintenance responsibilities are greater in an HOA than in a condo.
• Generally, monthly fees are lower in an HOA than in a condo;
• In an HOA, the unit owner is responsible for insuring the building itself, as well as the content, structure, etc.  In a condo, owners are generally only responsible for insuring the unit itself and its contents, rather than any structural elements.  Condo policies are usually cheaper than homeowner's policies, but the difference in cost is generally offset by the difference in fees.
• In an HOA, you generally own your parking space(s), regardless of whether they are attached to the actual building.  In a condo, parking spaces are generally defined as "limited common elements," whose use is exclusive to an individual unit.  However, in a condo, the Board generally has the power to reassign or change parking assignments, whereas in an HOA, they generally do not..  
• Both are generally subject to State Statute.  However, most States have more stringent statutes for HOAs than they do for condominiums.  
• With an HOA, any "yard" area generally is part of the owned land.  In a condo, all green space is considered part of the common elements.  (Although most HOAs regulate how the green space may be used, and what type of fixtures or amenities are allowed in a yard.)
• HOAs generally give an owner greater flexibility about what can be done to a particular unit.
• In an HOA, owners have no vested interest in common grounds; in a condo, all owners also have a vested interest in all common grounds and common elements.

Condo vs. Co-Op

Similarities:

• The Association owns the land, buildings, air space, common elements, structural elements, and generally, the utility hook ups;
• Maintenance of anything outside the unit is generally the responsibility of The association, and is managed by the Board of Directors.
• Owners are not responsible for insuring anything outside of their individual unit.
• Both are administered by elected Boards, comprised of members of the Association.

 Differences:

• With a co-op, you are not buying a piece of real estate; you are buying a share in a corporation.  It is considered "intangible personal property" for tax purposes.  With a condo, you are buying a piece of real estate.
• Condos are financed with traditional mortgages; co-ops must be financed through other forms of loan.
• Although both are administered by Boards, Co-op owners have a greater say in how things are done.  Almost everything that is done in a co-op requires a membership vote, while this is not true in a condo.  Because of this, Co-op Association Meetings are more widely attended than Condo Association Meetings, and co-ops generally have a more active membership.
• Statistically, co-ops have the highest percentage of owner-occupied units across all forms of shared ownership housing.
• Condos may me residential, commercial, or even mixed-use; traditionally, co-ops are residential only.
• In a co-op, you are purchasing a right to lease a particular unit, whereas in a condo, you are purchasing an actual unit.
• Co-ops generally consist of one or more apartment buildings, or they consist of land for pre-fabricated homes.  There is a wider variety of home type available in condominium complexes (garden style apartments, townhomes, apartment buildings, pre-fab units, etc.) than there is in co-op complexes.
• Monthly fees are generally highest in a co-op, as they include monthly rent as well as insurance, maintenance, upkeep, and taxes.
• Owners are responsible for paying for their own property taxes in a condo, whereas co-op fees include all property taxes.
• A condo unit may be a part of a land trust; because a co-op is not considered real estate, it cannot be placed into a land trust.  It may be a part of other types of trust arrangements.
• Condos often include more amenities than do co-ops.

Pros and Cons of Condos

Pros:

• Condominiums are good for people on fixed incomes, as the monthly fees are generally set; it is rare for a condominium to need to levy a large special assessment to cover costs of operation.
• Condos are fantastic for folks who do not want to be responsible for maintenance and upkeep.
• Application processes are governed by State Statute, and although one needs to apply to purchase a condo, there is little its Board can reject you for, other than financial issues.
• Condos are great vehicles for investors.  Most Boards do not require tenant screening, and are usually easy to operate as rentals.
• Condos generally make great vacation homes, as the Association monitors things while the unit is unoccupied, and handles any maintenance issues that may arise.
• Condos usually include all necessary services, such as trash pick-up, landscaping, etc.

Cons:

• The Board of Directors has the power to make a lot of changes without input from the membership.
• Insurance costs may be higher, as you are paying for both the overall condo plans, as well as a plan for your individual unit.
• Condos tend to fine owners for rules violations more than other forms of shared housing.
• An owner has less input as to outer appearance of his/her home and grounds.
• If a Condominium Association decides to disband, an owner may suffer an extreme financial loss.  Often, it only requires an 80% membership vote to dissolve the condominium.  Developers have been known to buy up units in order to swing a vote.  If the condo dissolves, you will generally receive below market value for your unit and share of common grounds.

Pros and Cons of Homeowner's Associations

Pros:

• Owning a building within an HOA is considered owning a piece of real estate.  The owner owns both the building and the land, as well as the air space and grounds.
• HOAs offer greater flexibility with what can be done to green space.  Although many prescribe guidelines for plantings, the owner has greater choice of what s/he can install.
• HOAs more often include a yard that is yours, as opposed to belonging to everyone in the Association.
• HOAs often provide amenities not found in typical single-family communities.
• HOAs are governed by an elected Board of Directors.  However, this Board has the least power amongst the three types of shared ownership housing.
• HOAs are good investment properties.  The monthly fees can be passed on to the tenants, and the Board will apprise the owner of any irregularities happening within the unit.  Boards usually have few screening requirements for tenants.
• If an HOA decides to disband, the owner will still be left with a valuable piece of land, as well as any improvements s/he has made.

Cons:

• HOAs have the highest maintenance and insurance obligations of the three types of shared ownership housing.
• HOA owners have no vested interest in any common elements or community amenities.
• HOAs often offer more rules and restrictions than they do owner support.
• Legally, HOAs are allowed to do little screening of potential members.  Because of this, their budgets may not be sound as those in condos and co-ops.  Statistically, HOAs employ special assessments to fund things more often than do co-ops or condos.
• HOAs are often described as having all the disadvantages of living in a single family unit, while having all the disadvantages of living in a condo.  Rules as to property use and appearance are very stringent.
• HOAs often utilize fines for minor rules infractions.

Pros and Cons of Cooperatives

Pros:

• Co-ops generally have the lowest buy-in obligations of any of the forms of shared ownership housing.
• Although owners do not build equity in a traditional sense, shares in a co-op may appreciate at greater rates than will a condo or HOA unit.
• Co-ops have the highest amount of owner input of the three shared housing types.  Co-op owners generally know their neighbors and have a sense of community not necessarily found in other forms of housing.
• Co-op Boards are allowed to do more stringent screening of both owners and tenants than are HOAs or Condo Boards.
• Co-ops are great for people on fixed incomes, as the monthly fees include everything, including tax and insurance.  A co-op resident only needs to insure the contents of their unit, similar to buying a renter's policy.  The co-op itself insures everything else.
• Co-ops handle all maintenance, insurance, and tax obligations.

Cons:

• You are buying shares in a corporation, rather than an actual piece of real property.  
• Co-ops have the highest monthly fees of all types of shared ownership housing.
• You cannot finance a co-op with a traditional mortgage, nor may you get an equity loan on the appreciated value of your shares.
• Co-ops require stringent background checks for both members and tenants.  They may deny ownership or tenancy for just about anything not specifically prohibited in the Fair Housing Act.
• Co-op shares do not pass to heirs like other forms of property.  Instead, they are treated similar to shares of stock.  They are subject to securities regulations. It can be more difficult for estate planning purposes.  Joint ownership of shares is also harder to set up than joint ownership of traditional properties.
• Co-ops are not the best vehicles for investments.  Because of the screening processes, they are harder to rent.  The Association pretty much has free reign to reject potential tenants.  
• A land trust and a co-op are not compatible.  Like with other forms of stock, they can be placed in certain types of trusts.  But because they are not considered real property, the Land Trust model cannot apply.

Which Type of Property is Best for Investors?

There is no clear-cut answer as to which type of shared ownership housing is best for investors.  The most important distinction here is that a co-op is not considered an investment in Real Estate.  If you are building an investment portfolio that includes stocks, bonds, and lands, a co-op, condo, or HOA can be a good investment.  All will appreciate at different rates, and according to different variables.  Years ago, co-op shares generally appreciated more quickly than an investment in a condo or HOA, but since the "Real Estate Boom," that is no longer true.  Many infill developments are appreciating very quickly.  And units in an HOA or Condo Association are easier to "flip." Generally, buying a co-op as an investment property is less desirable than purchasing in a condo or HOA for this reason.

Again, when you buy a co-op unit, you are buying a piece of intangible personal property, rather than a piece of real estate.  Thus, the tax ramifications are different, and should be thoroughly discussed with an accountant or attorney.  A co-op may help balance your tax obligations, or it may increase them.

We believe strongly in the Land Trust model for Real Estate Investors.  A co-op is incompatible with this model.  If you are building a portfolio based on the Land Trust model, you may want to stick to condos and HOAs.

Which Type of Housing is Best for Owner-Occupiers?

If you are looking for property to live in, either as your primary home or as a vacation property, any of the three types can be best, depending on your individual needs and desires.  We have provided the pros and cons of each housing model.  You will need to weigh these against your own considerations. This will also depend on where you are looking to purchase.  The New York City area has a higher percentage of co-op units than anywhere else in the US.  Co-ops in New York are generally cheaper than condos or co-ops, and they often appreciate faster.  Often, their rents are more reasonable than rental housing, but the ongoing costs are about the same. That is not necessarily true in other parts of the country.

If you are looking to buy into a shared housing community, but you have little available to put down, a co-op might be the best choice for you.  If you are looking to finance through traditional mortgages, an HOA or condo will be a better choice.  

Summary

In this two-part article, we examined three different types of shared ownership housing: condominiums, Homeowner's Associations, and Cooperatives.  We defined each model, looked at the similarities and differences, and discussed the pros and cons.  We also discussed considerations for property investors.

Here at the Law Offices of Heath D Harte, we believe the most important consideration is how an individual property will meet your individual needs.  And in order to determine that, you need to know the ins and outs of each model.  All three models have benefits and drawbacks.

Our own real estate portfolio tends to rely on condos and HOAs, rather than co-ops.  This is because we are property investors, we use the Land Trust model whenever possible, and we like to renovate and flip.  We tend to focus on real property rather than shares in a corporation when building our own investment portfolio.  We also focus on properties in more suburban areas, where co-ops are not as common.  However, your own investments may differ, and a co-op may be a valuable addition.

The most important consideration here may be what is contained in the community's documents. These documents need to be reviewed with a fine-tooth comb before any purchase is finalized, as they dictate how you may renovate, use, and sell your property.  Having these documents review by your attorney is beneficial.  Your attorney can advise you as to how the purchase will fit into your overall estate plan.

As always, we are here to help.  We have an extensive real estate law practice, and we understand the nuances of both the models and the documents.    Whether you are looking for an investment or a home for yourself, we are here to advise and help.