“What is the difference between a condo and a coop?”
“Why are co-ops so cheap?”
The idea of a “co-op” being a bunch of people, working together, living in harmony, and managing the property themselves? In reality, and at the risk of generalizing, I might say that co-ops offer just as many problems as condominiums, perhaps more.
At least with a condominium, a property management company (with their pros and cons, of course) is overseeing the entire building, and they’re a third party, who works at the request of the condominium corporation, via the board.
With a co-operative, the residents often self-manage, self-govern, and maybe even self-discipline.
Aside from management, there are massive differences between condos and co-ops, and I feel that in case anybody doesn’t know the two forms of ownership inside and out, this post is essential.
There are a host of smaller issues with co-ops, or to be fair, let’s call them “differences,” since “issues” might not apply if the resident values these differences.
Pets are often an issue, since many co-operatives don’t allow any pets.
Sales are difficult, since they require board approval.
Renting the unit can be made difficult, since it requires board approval as well.
These differences are incredibly minor in nature compared to the bigger issue – and yes, it’s an “issue,” as you’ll soon learn. The KEY ISSUE put simply: how do you finance a co-operative?
My buyer clients always come to me and say, “I found a condo that’s too good to be true! It’s in Rosedale, and it’s 1,600 square feet for $499,000! It seems too good to be true!”
Well, that’s because, it generally is.
Many buyers and other participants in the real estate market are aware that co-ops require massive down payments, usually a minimum of 35%. But if you don’t know, and you’re hearing this for the first time, then you’re probably in shock.
Consider that if you wanted to purchase a $500,000 condo, you could do so with 5% down, or as little as $25,000.
But that same $500,000 property, if it were a co-op, would require you to put down $150,000.
That’s quite the difference, wouldn’t you say? An “issue” for many buyers, no doubt about it.
In the case of many co-operatives in Toronto, the down payment could be even higher. 35% or 40% in this case would be $175,000 or $200,000. That’s absolutely insane, in the context of today’s Toronto condo market.
But what many people don’t know about co-operatives, even if they do know about the down payment, is how the rest of purchase price is financed. If it wasn’t expensive enough already – to come up with a 30-40% down payment, consider that financing the remainder of the purchase price is even more costly.
For the most part, banks will NOT lend on co-operatives. I’m sure there are exceptions to the rule, but my mortgage broker works with 30+ different lenders – comprised of banks, credit unions, and not a single one will finance a co-op.
That is probably my answer to the question “What’s the deal with co-ops?” And I might put it ahead of the little nugget, “You need minimum 30% down.”
So you’re now asking, “If lenders won’t lend, where do you get money?”
Good question, and the answer is daunting.
Case in point: what are private lenders charging these days?
10%? 15%? 20%?
I know those numbers sound ludicrous, when you consider that a 5-year, fixed-rate mortgage is currently hovering around 2.65%. But if rates for commercial properties are around 3.85%, and if Alt-A lenders are charging 5-6%, then it seems to reason that private lenders are going to be charging more. Way more.
I spoke to a private lender this week who would require 12 3/4% interest on a 65% LTV for a co-op.
Does that sound like something that interests you?
Believe it or not, this is the way most co-operatives are financed, unless the co-operative has their own in-house lender who is familiar with the property, and has lent on it before. But even then, you’re not getting 2.94%, since that is a fixed-rate, five-year mortgage.
And we all know that you can’t put a mortgage on a co-op, right?
You also need to understand that there is no legal title to a co-operative. There is no deed.
The resident, or occupant, of a unit in a co-operative does not own that unit, but rather has exclusive use to live there. The resident owns shares in the entire co-operative.
So if the resident doesn’t own the unit, and there is no title, then why would a bank lend?
What would the bank use to secure the loan against?
These are rhetorical questions, and it’s why conventional lenders won’t lend on co-ops.
In the event of a default on a loan, a bank can foreclose on a house or condo. But in the case of a co-op, where there is no title, the bank can’t foreclose. There is no asset to secure the loan against!
This is a bit of a circular story, but by now, you should understand the “issue” with co-ops.
They require a crazy down payment, are very difficult to finance, and thus the prices are extremely low when compared to that of a similar property of condominium ownership.
It seems to reason that a 1,600 square foot condominium, would cost $800,000, whereas it might cost $400,000 for a 1,600 square foot co-op.
Even then, the potential buyer has to decide whether the potential cost savings is worth the higher down payment, and higher interest rate on the loan.
Why might a potential buyer be attracted to a co-operative setup?
The idea of being “self-managed” is an asset to some people. Perhaps being self-managed is an asset, as is being self-governed, and having more control.
Personally, I am not sure of this.
My life is busy enough without having to constantly meet with other residents of my building to decide if we should buy another green bin, let alone approving every single purchase, sale, and lease of a unit in the building.
But co-operatives do sell, and there has to be a good reason for it.
The target demographic, in my mind, would have to be downsizers and retirees, who have cashed out of their homes, can purchase the co-op in cash, and who love the idea of paying less than HALF of what it would cost for the same space in a condo.
Other than that, respectfully, I have no idea why anybody else would consider it.
Can’t you find better things to do with your money than make a 35% down payment, and pay at least double the going rate of interest?
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