Let’s Revisit The Differences Between Residential Condominiums, Cooperatives, And Townhouses

In June 2010, I wrote an article for Hamptons.com explaining some of the differences between residential condominiums and cooperatives, as well as town houses. Given the comments of realtors interviewed in last month’s article regarding growing buyer interest in condos, I thought it might be of interest to our readers to revisit the subject.

To begin with, the purchase of a condo is the purchase of real property, but only the space within the walls for which the owner receives a deed, as well as an undivided interest in the property held in common by the unit owners. The purchase of a co-op is the purchase of personal property, the shares in the corporation that owns the property. The co-op tenant receives shares and a proprietary lease. The corporation owns the property “in severalty,” individually.

One of the most important distinctions between the two, co-ops are governed by a board of directors, and a condo by a board of managers. As part of their fiduciary duties to the shareholders, the board has the authority to approve or deny a prospective purchaser of the shares, as long as the board does not violate fair housing laws. In Suffolk County, a board must acknowledge receipt of an application to purchase the shares within ten days, and, if it chooses to deny the application, offer a reason in writing within forty-five days, otherwise the application is considered approved. The board may prohibit sub-letting, or require the board’s approval to sublet. It may also require monies paid by the shareholder to be held in escrow to fund maintenance charges, the funds used to meet all of the co-ops operating expenses. The board may impose a transfer fee on the sale of the shares, usually paid by the seller, commonly known as a “flip tax,” as long as the money is used to the benefit of the shareholders. In other words, co-op boards of directors are granted broad discretion in exercising business judgments, as long as they are in the interests of the shareholders and do not violate the law.

Bishops Pond in Southampton features an open concept living area. (Courtesy Photo)

Many purchasers object to the close supervision of co-op boards, and choose condos as an alternative. But, many are disappointed to learn that boards of managers of condos also have broad authority because of their fiduciary duties to the unit owners. For instance, while the owner of the condo cannot be prohibited from selling their unit, the board may retain to itself a right of first refusal, as long as it is exercised reasonably and in the interest of all of the unit owners. Let’s suppose an owner is in distress, and is willing to accept less for the unit than waiting might bring. The condo board would have the opportunity to purchase the unit at the lower price and resell it at a higher price that waiting might bring, rather than precipitate lower sales prices thereby reducing the values of the other unit owners. A condominium association also has operating costs. For instance, the maintenance of all of the real estate that the unit owners may own in common: pools, clubhouses, tennis courts, etc. While shareholders in a co-op pay maintenance charges, unit owners in a condo pay common charges. Either may deduct interest paid on a loan to finance the purchase of the unit or shares.

Consistent with their obligation to protect the interest of the unit owners, condo boards may also prohibit or restrict leasing and subletting, as long as fair housing laws are not violated. They may also impose transfer fees, “flip taxes,” on the sale of the unit, as long as they are reasonable.

With a townhouse association, the owner owns the real property under the house, the space within the walls, and an undivided interest in the property held in common by all of the unit owners. A homeowner’s association is the governing body. Otherwise, they are much like condominiums.

As several of the East End real estate professionals quoted in last month’s article said, only time will tell if this type of housing will have the same resale value as the single family home. Just as the comparable values of homes in a neighborhood can influence values, it is probably even more so with condos and co-ops.

Whether buying a condo, co-op, or townhouse, careful due diligence is the purchaser’s responsibility, and professional representation is advised.