Many of my clients ask me about co-ops. What are they? Should I buy one? How are they different from condos? Co-ops (short for co-operatives) are not as common here in the DC metro area as in New York City. Our real estate market here in Bethesda is more populated with condominiums so there is a little confusion about co-ops and what makes them different. The only co-op building in Bethesda is found at 5225 Pooks Hill Road – the Promenade Towers.
Here are some facts about co-ops…
The legal structure of a co-op is what makes it different from a condo. When you buy a coop you do not actually take title – the unit is owned by a corporation. Instead you are buying shares in the corporation and the corporation is giving you a proprietary lease to live in the unit as long as you own the shares.
Physically, a coop looks the same as a condo and the effect is similar. You pay a monthly fee, you have a mortgage, you live in the unit, share common areas, buy and sell the unit…all the same. However, there are some benefits:
1) When buying the unit, you do not buy title insurance; since you are not actually taking title. Save about .5% (that’s $2,500 on a $500,000 home).
2) Your co-op fee pays the property taxes. So you are not only saving thousands of dollars, but part of your co-op fee is tax deductible (the taxes that the coop is deferring to you). Condo fees are not tax deductible.
3) Co-ops sometimes take out underlying mortgages to pay for large improvements or as part of the initial financing for the co-op. Underlying mortgages transfer to the new owners and the value of the mortgage is subtracted from the purchase price, Underlying mortgage payments are just like mortgage payments; the interest on the payment is tax deductible. Many co-ops do not have underlying mortgages however. When looking at condos and co-ops, it is very important to understand what portion of the co-op fee is allocated to taxes and which part is allocated to an underlying mortgage. Unless you can break out those fees, the co-op fees may seem higher than a comparable condo’s fees.
4) Many co-ops require that the prospective buyer be approved by the co-op board. DC tends to approve new owners using the same criteria a lender uses to assess their credit worthiness. In contrast, in New York there are lots of stories of co-op boards turning prospective buyers down because they might be too famous – or infamous.
So why doesn’t everyone buy a coop???
1) Banks typically charge a slightly higher interest rate on the loan for a coop.
2) Banks as well as many coops, require at least 5% down, up to 20% down.
3) Most all Coops are not very investor friendly. Many have restrictions on renting. Absentee owners are frequently required to sell if they do not intend to continue living in the unit.
4) It is always important to read the co-op documents and seek legal guidance if you do not understand them.
If you are interested in looking at some co-ops around town, just give Lise Howe a call at 240-401-5577!