Jill Chessen and I were recently talking with David Goldberger and Lizzy Echt about downsizing. Typical of any downsizing conversation, we began talking about condos. So I asked, “would you consider a co-op as well?” David, like most of our clients, asked “what’s a co-op?”
Quick history: a hundred plus years ago only rich people could afford to buy houses. Co-ops were introduced as a way for working class people to break free from being renters for life. The co-op concept allowed them to pool their resources and buy real estate.
In the 1960’s, the concept of condominiums started gaining traction and condos quickly became a more popular form of ownership than co-ops. The primary difference between a condo and a co-op is how ownership is taken.
When you buy a condo you own the “real estate” inside the walls of your unit. When you buy a co-op you own “shares of stock” in a cooperative (co-op). The co-op owns 100% of the land and the building. Your shares in the co-op give you the right to live in your particular unit.
Both Washington, DC and NYC saw a number of impressive co-ops built in the 1930’s. Many DC co-ops are featured in the iconic coffee table book Best Addresses. These buildings are known for their distinctive architecture, high ceilings and old world charm. You might be surprised to know that one of the Watergate buildings is a co-op.
Co-ops provide three distinct advantages over condos.
1. Co-ops can borrow money for capital improvements. Condos cannot do this and need to levy an additional fee on the unit owners when extra money is needed.
2. Co-ops are allowed to have more restrictive policies on the buyer’s financial qualifications and on the renting out of units. This makes co-ops a great option for those that want these policies. This is especially true when it comes to renting. Co-ops can require that purchasers be owner occupants (not investors) and put limits on the number of rental units allowed. Condos can not do this.
3. Co-ops get you more for your money as they generally sell for less than condos of the same size. This means buyers wanting to minimize their purchase price and maximize their space may find that they can buy a larger co-op for less money than a smaller condo.
There are also three reasons why co-ops are less popular than condos, making the pool of co-op buyers smaller than condo buyers. First, those not familiar with co-ops tend to stick to condos. Second, monthly co-op fees appear much higher than monthly condo fees because co-op fees include more shared expenses and real estate taxes. Condo owners still have these fees, they just pay them individually. Third, many investors avoid co-ops due to the rental restrictions. The Claridge House in Foggy Bottom is one notable exception to this; they allow investors and many of them are getting excellent rental returns.
What I find most unique about co-ops is their emotional appeal to certain buyers. The shared ownership concept seems to heighten their sense of community and building pride. Perhaps being part of that special feeling is the real opportunity in co-ops.