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Everyone needs a roof over his or her head; regardless of what option they choose. Some Americans prefer to live in a lakeside log cabin while others may favor living in a luxury high rise in a city that never sleeps. If you prefer the latter, several options come into view as not all dwelling units operate the same way. While some properties are called condominiums, others are cooperatives.

While they can both be excellent home choices, there are differences between the two that potential homebuyers need to be aware of before signing on the dotted line.

What is a Condominium?

A condominium is a type of real estate property that also goes by the moniker of condo. This type of property allows a person(s) to purchase an individual unit within a larger complex, build equity and each individual unit holder is responsible for paying their own property taxes.

Being called a condo has nothing to do with the type of structure a person lives in as apartment buildings, commercial warehouses and townhouses can all be called condos. The reason why they would end up with that title is because of the financial structure behind the property type.

Buying a condo is a similar process to buying a single-family detached home. Consumers actively seek out the properties, make a bid and secure a mortgage to finance the purchase. Mortgage payments are made directly to the lender and the homeowner technically owns everything inside their four walls.

A condo owner also has a fiduciary responsibility to the building at large as everything outside their unit is the shared responsibility of all property owners of the structure. Generally, condo owner's have to pay monthly homeowner association (HOA) dues to contribute to the overall maintenance of the building. If larger issue arises that requires a large sum of money to fix, the condominium may levy an assessment on the building and all condo owners will be required to pay their fair share.

While some condos are simple and only have enough space to consider hallways and entrances common areas, others have sprawling grounds, swimming pools, tennis courts and other luxury amenities. Assessment amounts and HOA dues will fluctuate due to those influences and other factors such as square footage of the property owned.

What is a Cooperative?

While on the surface, it may seem like cooperatives (AKA co-op) are just like condos, there are some major differences between the two, specifically in regards to property ownership. Those interested in buying a co-op will still go through the same process of home selection and instead of a mortgage a home loan is required to finance the deal. Once the cash exchange is done consumers become shareholders (generally in a limited liability corporation) not property owners.

Consumers interested in buying co-ops generally have to pass board approval before become approved as a shareholder. Co-op boards will conduct a background check similar to those conducted by mortgage lenders. Only upon approval by the board will the sale transaction go through and as a result, the property buyer will be invited to join the corporation and get a lease on their unit.

While shareholders cannot officially build equity in a co-op unit, they can certainly experience large gains from selling their shares to the next co-op owner. However, any potential buyer must also go through the same board approval process as well. As a shareholder, co-op owners have the legal right to vote on any changes regarding the association such as electing a president and project approval.

Monthly HOA payments and even assessments are part of the fiduciary responsibility. One great perk about being a co-op owner is that those monthly HOA dues cover the property taxes associated with living in a unit as it is the financial responsibility of the corporation, not the individual share holders.

Condos vs. Coops

Aside from the major financial differences between the living arrangements, there is one other primary difference between condos and coops. According to city statistics, around 43 percent of the New York city's non-rental housing is co-op. The situation is unique to the area.

While living in either type of property can provide the same sense of security there are some serious differences between the two:

  • Condo dwellers must pay their own property taxes, providing them with a tax break. Co-op owners do not pay their property taxes directly and cannot get any tax breaks.
  • Condo buyers must secure mortgages, while coop buyers must secure loans, as they are not really buying property.

Either way, the market is flooded with a surplus of both types of inventory and historically low mortgage rates can make owning one a reality.