Condos and Co-ops and Home Loans

Condos and co-ops may be the ideal real estate solution if you’re just starting out or you’re looking to downsize into something with less maintenance and less cost overall.  Owning either a condo or co-op will allow the owner to still enjoy some tax benefits afforded real estate ownership in the US as well as potential property appreciation, while the property is maintained by others.  That’s not to say, however, that condominiums and co-ops are a trouble free alternative to free standing homes.  In fact, quite the opposite may be true. 

Condos

Condominiums or condos are individually owned apartments in a building or complex.  Owners are free to buy and sell their condo at will.  Condo owners have their very own deed and title and simply pay a bit into the upkeep and maintenance of the property.  The condominium owner holds legal title to the unit and pays real estate taxes and common charges for the maintenance of the building and common areas.  Each condo unit owner owns an individual apartment in what is referred to as fee simple.  The general attraction to condominium ownership is the properties can be less expensive than single family housing in the same area.

A condominium owner owns the unit in fee simple which is similar to most all other methods of home ownership, and also may own an undivided interest in the common areas of the condominium such as a pool, playground, lobby area, like parking lots, recreations areas, and hallways.

Co-Ops

Co-ops on the other hand, are not true real estate ownership.  Members of a cooperative or co-op own stock in the company that actually owns a building.  You’re not paying for an apartment; you’re paying for the right to lease one.  Like with condos, you’ll pay a portion of maintenance fees and upkeep, but you’ll also be contributing toward the taxes and insurance on the building.  Co-ops are also able to control your use of your unit.  In a cooperative apartment complex you don’t actually own any real estate.  Rather, you own shares in a not-for-profit corporation.  When it comes to sell the property, the member of a co-op may sell their shares in the cooperative whenever they like for whatever price the market will bear, much like any other residential property.

Potential Pitfalls

The biggest problem of buying a condo or buying into a co-op is the close proximity of others.  You may be subject to rules set by others such as no dogs and no major renovations.  You’ll also be paying into the same building as many others which means you may be looking at trouble if the others, well, don’t pay in.  If your neighbors start to default on their maintenance payments and mortgages, you’ll have to help cover the difference.  If it happens too much, you may not be able to sell your unit as the whole complex will become unattractive to buyers.

Mortgage guidelines for condos and co-ops are more restrictive.  As a general rule, the down payments will be larger and the mortgage rates will be higher.  Mortgage lenders generally have even more restrictive lending guidelines for co-ops.  There are far fewer mortgage options available, the down payments are often larger than they are for condos and they charge even higher mortgage rates.

Buy In Carefully

If you’re going to buy a condo or are considering joining a co-op, you’d best consider very carefully.  The banks and other members of the co-op will be considering you just as closely if not more so.  Banks are often hesitant when it comes to buying into group properties.

When a new condominium unit is built, banks often balk at lending money to prospective buyers.  The building sponsor most likely owns the bulk of the units in the building which means he could easily turn around and rent them rather than selling them.  The bank is also hesitant to put itself at risk if the majority of units are owned by a company that may default on the underlying mortgage thus causing you to default on yours.

Today, however, this is less of a problem as most building sponsors arrange financing prior to building.  Prospective owners may establish a mortgage with the arranged lender or with another lender of their choice, but the financing is a bit more secured, which is to your and the bank’s liking.

Understanding Co-ops

Co-ops are very special entities that have grown in areas such as New York City.  In a co-op you must not only arrange financing with the bank, but you must also pass muster with the co-op board.  The co-op board is comprised of other residents who want to know exactly who is moving in next door.  They will dig through every aspect of your finances to be sure you are a suitable resident, and it is not uncommon for applicants to be approved by the bank, but denied by the co-op board.

Protect Yourself

The best way to protect yourself with either a co-op or condominium is to scrutinize the finances and inner workings as much as your own are currently being investigated.  Find and work with a knowledgeable realtor and attorney you can trust to help examine the statements of each residence to determine if it is a sound investment.

Understand the differences between styles of buildings as well.  You may find newer buildings have lower taxes, while older buildings have different maintenance fees depending on how much is still owed on the underlying mortgage.

Mortgage Info on Condos and Co-ops

Make sure to check the available mortgage programs for either a condo or co-op in the area in which you are home shopping.  Co-ops are less common product and the mortgage lenders and banks that make these home loans are usually local to the market.  Condominiums are far more common and most all mortgage lenders and banks that make mortgage loans make home loans for condominiums.  The mortgage rates may be slightly higher as well as the down payment requirement for these properties and theses terms may change with the geographic area.  Some geographic areas have become overbuilt and greater percentage of the condos and co-ops are facing higher foreclosure and delinquency rates on the underlying home loans that will often scare off mortgage lenders from making more mortgage loans to those types of properties. 

Ownership in these property types can be very rewarding as long as the buyer and potential home loan applicant is aware of the property and mortgage market and its potential pitfalls.  The mortgage calculators can be used to make a variety of mortgage calculations on these home loans as long as the appropriate mortgage rates and loan terms are used for the input.