In more urban environments, like New York, Chicago, the District of Columbia or San Francisco, single-family homes with space between buildings are less common. In these more dense locations, homeowners are more likely to own a home that shares a wall, lobby or floor with other homeowners. Condos, townhouses and cooperatives (or co-ops) are the most common types of these homes, and because of the shared space, ownership is a different between them.
Here’s what you need to know when trying to decide between a townhouse, co-op and condo.
Expect Homeowners Associations
One notable aspect of owning a townhouse or co-op is the expectation of being governed by a homeowners association, or HOA, those single-family homes can also be part of a community HOA. In any HOA, residents are required to abide by the rules set by an elected board of managers or directors. Within the HOA community, residents may not be able to build fences, landscaping or house extensions however they wish. They risk penalty if their plans go against certain rules.
If a homeowner violates a rule, the HOA may impose fines or liens on that resident and the house. Although some freedom is given up by the residents, the HOA’s rules and guidelines for the community should aim to preserve or improve the value of the individual properties or units for the good of the whole. Membership dues are often used to maintain, enhance or repair community amenities, facilities and common spaces.
Co-ops, on the other hand, have a committee or board of directors. They oversee the building and can approve and deny who can live in their cooperative.
[Read: What Is an HOA? Your Guide to Homeowners Associations]
Townhouses
Townhouses are single-family homes, like free-standing houses, but they share exterior walls with neighboring houses. They may form part of a larger HOA and abide by the community rules or guidelines, and then benefit from sharing costs and expenses for the common good.
In apartment living in a condo or co-op, there may be a live-in superintendent or doorman to help maintain the building. The owner of a townhouse, however, is mostly on his own fix any problems as they arise, whether it’s salting the sidewalk in the winter, replacing an old boiler or taking the trash out to the street. There is certainly a pride of ownership that comes with all this, as well as certain freedom, but for many it’s also a lot of work and potential risk if any structural problems arise.
Condominiums
Condominiums are considered real property and are generally individual units within a larger building. The building is run by a board of managers and the occupancy of units is governed by the condo’s bylaws and house rules. Many residential properties are built from scratch using this form of ownership to sell individual apartments.
Individual units can be sold, and the governing board of managers has a right of first refusal on any proposed transfers or leases. Many people like condos because buying or selling them is on par with selling a house in terms of ease of entry and exit. Owners can generally rent out condo properties and hold onto them as investments. Some people own condos for years without ever even living in them, just holding onto them as rental properties and hoping the market values increase over time.
[Read: 10 Helpful House Hunting Apps for 2023]
Co-Ops
A variation on condo ownership evolved in New York City and other places during the mid-20th century, known as the cooperative. Instead of a 100-unit residential building being subdivided into 100 individual condo units owned in fee simple, the building transfers ownership of the entire building to a cooperative corporation. Residents are offered shares in the cooperative corporation along with a proprietary lease, setting forth the terms and rules of residency. The cooperative corporation is governed by a board of directors.
Because the corporation is a joint investment and the co-op board members are shareholders, they may not allow just anyone to purchase an apartment (and shares) in the building. The board will look through the applicant’s finances, complete a credit check, ask for letters of recommendation and conduct an in-person interview.
Buying a Co-Op May Be More Difficult
In New York City, most co-ops have an absolute right to approve or reject proposed purchasers, as long as the reasoning doesn’t violate fair housing laws that prohibit discrimination against protected classes. Though these restrictions may be a turnoff for prospective purchasers, one can make the argument that the institution of the co-op helps keep real estate values stable, even in the face of recession or economic downturns.
For example, when the housing market crashed in 2008, the foreclosure rate in Manhattan was significantly less than many other parts of the U.S. If a bank approved a loan for a borderline homebuyer, maybe with bad credit or insufficient financial qualifications, the co-op board would likely reject that candidate. Thus, even if someone was able to obtain a loan, they still might not pass a co-op board, which would act as another check to make sure buyers were not biting off more than they could chew in terms of shouldering the financial responsibilities of owning real estate.
For someone who is looking for a primary residence and plans to live there for years to come, a co-op can be a great option. There is often excellent value, and a certain level of control regarding the financial strength and even behavior of neighbors, which can protect the investment.
In the end, whether someone buys a house as a forever home or an income-producing investment property, a primary residence or vacation home or a house versus a unit within a large building, the type of ownership you choose may affect where you live, the building you live in and how you interact with your neighbors.
Condo, Townhouse and Co-op Mortgages and Down Payments
When you buy a townhouse, it’s basically the same as purchasing a regular house since you own the land beneath it. Townhouses can be purchased with a wide variety of mortgages. Low down payment mortgages, like FHA loans, only require 3.5% down.
Condo loans are similar to traditional mortgages, although lenders will have additional requirements for the building itself – for example, a conventional Fannie Mae and Freddie Mac loan requires that no more than 15% of the units in the building can be more than 60 days late on HOA dues.
Co-ops require special financing called co-op share loans. These loans usually require a down payment of at least 10%-20% and a lower debt-to-income ratio than traditional mortgages.
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Condo vs. Townhouse vs. Co-Op: Which Is Right for You? originally appeared on usnews.com
Update 05/24/23: This story was published at an earlier date and has been updated with new information.
