Condos, PUDs, Co-ops: What's the Difference?
When it comes to buying your first home, the many options can be confusing. Skyrocketing prices and land scarcity increasingly prevent first-time buyers from purchasing single-family dwellings, and in a Real Estate market where multi-family and condo living abounds, consumers, find themselves turning to the alternatives — condominiums, townhomes, PUDs, and co-ops. What are they, and what’s the difference?
First, all of them are considered Common Interest Subdivisions (CIS), in which individual ownership of a residential unit is combined with the shared ownership of a common area. Let’s look at the differences between these homes…
Though commonly mistaken as what is assumed to be a particular type of building or structure, a condominium is actually a form of property ownership where each unit in a given complex is individually owned, and all common areas are shared.
After the condominium boom that effected Massachusetts in the 70's and 80's, thousands of rental units were converted in to condominium ownership, and in some areas where the entire rental stock was converted, condos can make up the majority of the Real Estate market in many of the communities in and around Boston.
Owning a condo is similar to owning a house. You have a deed and mortgage and pay property taxes, but what you really own is “airspace”. You do not own the land on which the condo sits. Walls, floors, and ceilings are owned in common among all residents. You join the homeowners association by default and pay monthly condo fees to cover management, hazard insurance, maintenance, garbage collection, hallway lighting, and landscaping. Part of the condo fees are set aside in an account for long-term maintenance and future assessments.
Depending on the association, condo owners usually may remodel only within the guidelines provided by covenants, conditions, and restrictions. These restrictions may specify everything from how maintenance is handled to what color curtains you can hang on your windows. It’s a smart idea to read them before buying a condo. Also, ask for recent reports outlining future plans for the complex (ie: special assessments such as a new roof, exterior repairs, or repairing/replacing a specific feature effecting the common areas).
Maintenance is shared with the other condo owners in the association; it is important to remember that your property value depends on the condition and desirability of the entire development.
Planned Unit Development (PUD):
A PUD is a community comprised of a variety of homes that appear similar in nature, but can include any combination of single family, condo or even commercial property.
Similar to condos, PUD owners individually own the residential structure along with a small parcel of land surrounding it. As with condo ownership, PUDs require membership in the homeowners association, however, the land around each unit is maintained by that unit’s owner. PUDS also often include other shared amenities such as pools, tennis courts or playgrounds whose use is exclusive to the owners in the association. If you’re interested in having a bit of a yard, as well as the possibility of additional recreational amenities, this is the way to go.
In contrast, a co-op is not a singular form of ownership, and you are not buying real property. Rather, it is a legal term for housing that is owned and controlled jointly.
This is a housing complex owned by a corporation made up of all the tenants —rather than owning your unit, you become a fellow shareholder in the corporation that owns the property. The number of shares you are issued depends upon the size of the unit you own. Larger units’ owners have more power in deciding how the building is run. You also pay fees to cover your portion of the building’s property taxes, mortgage, and the costs of repairs and improvements for the common areas.
Co-op owners depend on each other financially, so expect heavy scrutiny of both your financial history and your personal life if you’re buying in to one. While co-ops offer an affordable alternative to condos, it is up to the co-op board to approve all applicants, so joining can be a challenge in itself.
"Townhome" is an architectural term and doesn’t actually describe a form of ownership. It’s commonly used to describe an attached row house. A townhome could be either a condo, PUD or co-op.
Advantages of Common Interest Ownership
Considering all the options, what are the advantages of buying a condo, PUD, or co-op?
First, depending on the area, prices are typically much lower than for single family homes, and landscaping and maintenance are minimal or nonexistent. Some residents say they feel safer in a “cluster” environment, while others cite the peace of mind from having common maintenance service. Additionally, having a pool, clubhouse, and/or exercise room onsite is convenient.
Homeowners’ association fees are not tax-deductible, and the fees are considered an ongoing expense that will lower the amount of mortgage you can qualify for. CIS documents are long and complex, often hard to understand. It's in your best interest to hire a real estate attorney to review the documents and explain the significant points.
The most important thing before considering buying any property is to do your homework. Once you’ve decided to take the plunge, you’ll be building equity and get a tax break to boot. Buying into a CIS can be a great way to get your feet wet in the property-ownership game.