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Cover story: Financing for condos, co-ops different

- - Thursday, May 3, 2012

When Heidi Krieger, who recently purchased a one-bedroom co-op in Cleveland Park, first started looking at co-ops and condos, her first concern was to find a home she loved. Her second priority was to make sure the monthly fees were affordable.

"I fell in love with Cleveland Park, the Tudor-style co-op building and, most important, the unit itself," Ms. Krieger said. "Once I did the research and understood how co-op financing works, I was ready to buy."

Co-op ownership differs from condominium ownership in one essential way: The homes are not owned by individuals. Instead, the co-op owners are members of a nonprofit corporation, known as the cooperative association, which owns the property. Members own co-op shares according to the size of their homes.

"Co-op owners don't really own real estate; it is more like a lease," said John Heithaus, chief marketing officer of Metropolitan Regional Information Systems (MRIS) in Rockville. "The co-op shares have the potential to appreciate, and homeowners still have the ability to deduct their mortgage interest in the co-op loan."

Susan Isaacs, a Realtor with Coldwell Banker Residential Brokerage in the Dupont Circle office, said there are approximately 120 co-op buildings in the city. Her website (www.susanisaacsre.com, click on Tools2Use) provides extensive information about purchasing a co-op and lists co-op buildings in the District.

"While some buyers assume that buying a co-op is complicated, the process is actually not nearly as scary as it sounds," Ms. Isaacs said. "Co-ops tend to a have a lower price per square foot than condos, and even though they often have higher co-op fees, those fees include property taxes, and some even include utilities and a maintenance staff."

Financing a co-op purchase is similar to paying for any other property, except that not all lenders offer co-op loans. Financing a co-op requires approving both the borrower and the building, so lenders need to review the building's assets in addition to qualifying the borrower, Mr. Heithaus said.

"Buyers need to find out which lenders provide co-op loans, but most co-op buildings have a list of lenders who have approved other loans in the building," said Charles Vance, an area sales manager for Wells Fargo Home Mortgage in the District.

"Lenders who provide co-op loans usually have a list of buildings that have already been approved for a loan, but if the building isn't on the list, the lender will need to review the co-op's financial information and insurance. Approving a building can add a few weeks to the loan process."

Mr. Vance said Federal Housing Administration loans are not available on co-ops.

"Only conventional loans are available on co-ops, and they are limited to owner-occupants," he said. "Borrowers will have to make a minimum down payment of 10 percent for a co-op."

Other than the larger down payment, Mr. Vance said co-op borrowers will need qualifications similar to those of conventional-loan borrowers, including a solid credit score and sufficient income and assets to handle the mortgage payments.

While Ms. Isaacs and Ms. Krieger said interest rates on a co-op mortgage may be slightly higher than for a condo, Mr. Vance said interest rates are close to the same on both types of loans.

As Ms. Krieger found out, buying a co-op requires not only financial approval from a lender, but also personal approval from the co-op board.

"My interview with the co-op board went really well, and then I was elected to the board as soon as I moved in," Ms. Krieger said. "The building has just 13 homes, and it seems like a pretty relaxed group of homeowners."

Ms. Isaacs said co-op boards have more control over their buildings than a condo board, and so prospective buyers should research the board to get a sense of how it operates.

"Every co-op has a board review process, so you can't just sell your home to anyone," Ms. Isaacs said. "A lot of co-ops have a very rigid process for renting out your home, which can be an issue for some buyers. It doesn't necessarily mean you can't rent it, but you may be restricted as to how long you can rent it, and the board may need to approve your renter."

The restrictions on renting a co-op can be a positive aspect of co-op ownership for some owners. Ms. Isaacs pointed out that some condominium associations have run into trouble with financing approvals because loan guidelines have restrictions on the number of investors compared to owner-occupants.

"Owning a co-op offers owners a greater degree of control over how their investment is managed compared to a condo," Ms. Isaacs said. "Many co-ops even have a maintenance team and allow residents to have services provided for a low fee."

Co-op owners who want to remodel their property will need approval from the co-op board.

"You are essentially leasing your unit and owning shares in the co-op, so if you want to renovate, there are likely to be a greater number of restrictions, depending on the co-op board rules," Ms. Isaacs said.

Buyers considering a co-op or condo should carefully review the rules of the associations and boards as well as compare the fees from one building to another because they vary widely in what is included.

"Buyers who take the time to do the math will find that owning a co-op and owning a condo are often very comparable financially," Ms. Isaacs said. "I would also recommend consulting with a tax specialist because the shared loan arrangement and the ability to deduct some of the co-op fees could have tax benefits."

Mr. Heithaus said co-op buyers also should consider whether they may want to rent out their property at some point and the impact of co-op ownership on resale value.

According to Real Estate Business Intelligence (RBI), a subsidiary of MRIS, the average price per square foot for a condo in the D.C. Metro area in March 2011 was $252.32, while the average price per square foot for a co-op was $81.21. Condo values rose in March 2012 to an average of $265.42 per square foot, while co-op values averaged $142.76. When comparing year-to-year prices, averages can be skewed by the fact that relatively few co-ops are sold each year.

"Co-ops have diminished liquidity when compared to a condo simply because the ability to rent and approval for new buyers is controlled by the co-op board," Mr. Heithaus said. "In general, I suspect that co-ops don't appreciate as quickly as condosbecause of the lack of turnover, plus they likely take a little longer to sell because of the possibility of the buyer qualifying with a lender but not with the board."

According to RBI, the average number of days on the market for a D.C. condo in March 2012 was 74, while the average number of days on the market for a D.C. co-op was 140.

The lack of FHA loans and the 10 percent down-payment requirement may reduce the pool of prospective buyers for a co-op.

Co-ops remain attractive to many buyers who intend to own their home for the long term without renting it to tenants and those who appreciate the often high level of maintenance and services often associated with a co-op. Working with a lender, a Realtor and an attorney with co-op experience can go a long way to ensuring co-op ownership is a good fit.