Victor Hussein: What’s the difference between a condominium and a co-op?

condoQUESTION: We have been looking into purchasing a “co-op condominium” and are wondering if this is the same thing as a “condominium”?  I have been told there is no real difference between the two, is this true?

ANSWER: Co-op Condominium’s, or Co-operative Condominium’s, are different from what are generally known simply as Condominium’s.  There are several differences between these types of housing, however, perhaps the two biggest differences are:

1) Share Ownership: Rather than owning real property, as is the case when purchasing a condominium, in a co-operative condominium (“co-op”) situation, you are actually purchasing shares of the corporation that owns the condominium project.

As a shareholder, and, once you own the required number of shares, you can reside in one of the units of the condominium project.  However, do not mistake that as being your owning that particular unit.  You do not.

As an additional caution, most co-op’s also have an approval process before you can purchase any shares of the corporation.  In this way, the owners of the corporation, and therefore, the residents of the co-op, can control who will be their neighbours.  By having an approval process, co-op’s can control and offer certain lifestyle environments, such as no children, exclusively seniors, or even, singles only.  The latter being more common in the United States.

2) Getting a Mortgage: Getting financing to buy into a co-op is somewhat different than your typical mortgage.  The complication arises from the fact that you will not be owning any real property.  In other words, you will not be able to put your name on title to any particular parcel of real property since none is actually being purchased.  This poses difficulty since your lending institution will not have anywhere to register its “mortgage”.

In a typical home or condominium purchase situation, most lenders, when approving a mortgage, will look at the borrower and the property being purchased.  If: i) the borrower is deemed financially sound; and,

ii) the property being purchased has an appraised value that satisfies the lender that its funds will be secured;

then the loan, or mortgage, is advanced.

However, in the case of  purchasing shares in a co-op, the lender must take a different approach since no actual real property is being purchased to secure the loan.  Therefore, when deciding  to lend money to someone who wishes to buy into a co-op, lenders follow a different approval method and usually also set different criteria for the borrower to meet.

First, the borrower must not only be deemed financially sound, the borrower is also usually expected to invest a much higher down payment than normal.  The down payment can range and can be as high as 60 – 70 percent of the total share purchase price.

Second, the lender will also take a very close look at the corporation into which you wish to buy shares.  This is to ensure, among other matters, the corporation is financially sound, and is managed well.

The lender may also look at other factors, each lender having its own set of guidelines.  Only after these criteria and guidelines are satisfied, will the loan  be approved.

Finally, before buying into a co-op, do your research.  Your research should include such steps as meeting with the other shareholders (or residents) of the corporation — ask them how they enjoy living there, do they find the environment too controlled, and so on; review the rules and regulations, the by-laws, etc. very carefully – you will be governed by them; find out how easy it is to sell your shares and leave the co-op if you so decide.  By doing your research, you can ensure your needs will be met and you will be protected from any unexpected surprises.  Best of Luck!

More from Victor Hussein as he talks about:

Title Insurance

Mortgage Renewal

Pricing Your Home Correctly

Fences and Property Lines

Tips and Traps when buying a home

Home Sellers and real estate commissions

Victor Hussein is a Kitchener Waterloo lawyer, specializing in real estate.

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