8 Things Every Buyer Should Know Before Purchasing a Co-op or Condo Apartment

1. Know the Difference Between a Co-op and a Condo
A Co-op: Buying into a cooperative cooperation, or co-op, is a securities exchange, not a real estate transaction. The buyer purchases shares in the corporation that owns the building. As a shareholder, he or she has the right to lease a designated apartment from the corporation. Each shareholder also has the right to vote for the Board of Directors, who in turn runs the building.

A Condo: Buying a condominium, or condo, is a real estate transaction. The buyer purchases real property, which comes with a deed, much like purchasing a house. Condo owners also vote for the Board of Directors, which runs the building in basically the same way as a co-op board, but with less sweeping authority

2. Know Whether You Want a Co-op or Condo
Narrow down your search by deciding in advance which form of apartment ownership you prefer.

A Co-op: Some people prefer co-ops because they tend to be more restrictive about who can buy or sublease a unit in the building. As a result, co-ops tend to have more occupied units than condos (as opposed to investor-owned units which are sublet) and can impose stricter guidelines for new buyers, such as all cash purchases, high levels of savings, and so on. Many people feel that this increases both the security and the financial viability of the building.

A Condo: Some buyers prefer a condo because there is more flexibility in terms of subletting and apartment usage. It is usually permissible to operate a business out of your unit. There is usually no board review of new buyers so purchasers do not have to reveal all their finances to the board, be interviewed, or pass board approval in order to buy a unit.

3. Know the Financial Difference Between a Co-op and a Condo
A Co-op: Most co-op buildings have an underlying mortgage on the building and the mortgage payments are included as part of the monthly maintenance fee paid by each shareholder. The mortgage interest and the real estate tax portion are part of your maintenance on the unit. Because mortgage payments and real estate taxes are included, maintenance fees tend to be higher in co-ops than in condos, but this is usually offset by a lower purchase price

A Condo: Condominiums do not carry underlying mortgages on the building and individual owners pay their own real estate taxes. Therefore, maintenance fees tend to be lower in condos than in co-ops, while purchase prices tend to be higher.

4. Know How to Compare
Monthly Carrying Costs Between Owning and Renting: When considering how much your monthly housing costs will be, be sure to take into account the tax savings you'll receive as a co-op or condo owner. Ask each co-op you look at what percentage if the maintenance fee is tax deductible (this will be the interest portion of the underlying mortgage and the real estate taxes). In a condo, your real estate taxes are deductible. In both types of apartments, as in any primary or secondary home, the interest portion of your personal mortgage is also tax deductible. Add up all these tax deductions, multiply by your tax bracket percentage rate, and you will see how much of your housing costs you will get back from the government in the form of homeowners tax savings. For example, if your interest and real estate tax payments will be $18,000 a year and you are in the 30% tax bracket (take into account city, state, and federal taxes), then you write off the complete $18,000, giving you a tax savings of approximately $6,000. It pays to figure this out ahead of time to see how owning will compare with renting in terms of annual cost. If the carrying costs on your rental are $1500 per month and the carrying costs on the co-op you are considering are $2,000 per month ($1,200 in mortgage payments and $800 in maintenance fees), you must consider that as much as $16,000 of the co-op costs should be tax deductible, resulting in a tax savings of nearly $5,000. So $18,000 in rent versus $24,000 in mortgage and maintenance are about equal once the $5,000 in tax savings has been figured in.

5. Know Who Lives There
Spend some time in the lobby watching who goes in and out. Stop to chat with building residents and ask what they like about the building and what they don't like. Try to meet or speak to the board president or other board members. Get a feel for the type of people who live in the building.

6. Know Who the Management Company Is
Most co-op and condo buildings hire professional management firms to do the day-to-day management. Find out the name of the management company and meet the management firm. He or she should be able to answer your questions about the financial and physical condition of the building.

7. Know the Physical Condition of the Building
Ask to see an engineer or architect's report. If you are serious about an apartment, consider hiring your own architect or engineer to evaluate the building and the unit. Find out what major capital improvements have been completed on the building in the last five years (roof, elevators, boilers, etc.) and what is planned for the next special assessment to each owner.

8. Know the Neighborhood
Spend some time in the neighborhood to make sure you like it. Check out the nearby food stores, pharmacies, health and other merchants you might need. Check out nearby transportation as well as school bus routes.