Building and Ownership Types: Four Degrees of Separation
When buying a house, know the different types of home ownership so you don't miss out on your dream property. Here, a comparison of detached single family residences, PUDs, condos and co-ops.
Whether you already have absolute clarity about which types of buildings and ownership do and don't work for you, or you remain open until the end of your house hunt, you should at least know what these various designations mean. It might save you from summarily rejecting -- or not even looking at -- the property of your dreams because you weren't clear on the difference between a detached home and a planned unit development.
Building & Ownership Types: Four Degrees of Separation
When you think of a condominium, you might think of an uber-modern, metropolitan high-rise a la Trump Towers. However, the common interest development (of which condos are one sort) was one of the first forms of property ownership respected in ancient Roman civilization, and was even written into the Napoleonic Code of 1804.
In all of America, all housing units are classified as either single family or multi-family, and there are only four different ownership boxes into which single family residences can be classified. These are based on the degree of "common interest" you share with your neighbors, if any. (Not interest as in hobbies, but interest as in legal ownership rights.) Every building you run into will fall into one of these four boxes, and the classification of the unit you choose will have a major impact on your rights and obligations, as well as your monthly budget. Once you understand the degrees of separation -- or common interest -- the building types make a lot more sense.
The Common Interest Continuum
Four Degrees of Separation
INCREASING SHARED OWNERSHIP INTERESTS
Detached Single Family Residence * Planned Unit Development * Condominium * Co-operative
The Two Extremes: Detached and Co-Ops
At the far ends of the continuum are detached single family residences and co-operatives. Consistent with their extreme natures, detached homes are found everywhere and co-ops are found infrequently except in NYC and the District of Columbia.
Detached Single Family Home
A detached single family home is exactly what it sounds like -- a single building with everything within the four exterior walls intended for one family on a lot separate from other homes. When you purchase a detached home, you are solely responsible for paying your mortgage, property taxes, and utilities. You also bear all responsibility for insuring, maintaining and repairing your property -- the home and the lot and everything on it. Other than local laws and building codes, nothing stops you from doing whatever you want to your place, inside and out. If you want to paint your home fluorescent green with purple stars, nothing but the boundaries of good taste (and the cries of outrage from your neighbors) will stop you. Same with having pets and renting your place out to a roommate or a tenant -- you are the mistress of the entire domain, so you may do as you please.
Pros: It's all you. You have the freedom to do as you choose with your property and have more privacy and fewer neighbor issues than if you shared walls with someone.
Cons: It's all you. If the pipes burst, the roof leaks, or the tree's roots grow into your septic system, there is no property manager or association to which you can turn for help. (There are inexpensive home warranty plans, though, that can minimize some of the risks of big repair costs.)
In a co-operative, or "co-op," a corporation owns the entire property, which is usually a building of apartments (also called "co-op"s) and the land beneath them. (Co-ops can actually be made up of any type of building, but nine times out of ten, a co-op is a high-rise building.) This corporation's members are the owners of the individual apartments or units, hence, the company is known as a "co-operative corporation" and the building and units are called co-operatives. Instead of "buying" a residential unit in the "co-op," an individual must buy shares of stock or membership shares in the corporation. When you buy shares in a co-op, you obtain the exclusive right to use your particular living unit through a co-operative ownership contract. This contract -- between the buyer and the corporation -- binds the owner to comply with the bylaws of the co-operative, to pay the co-op's monthly fees for operating and maintaining the building, and to pay the buyer's proportional share of the building's property taxes.
Each co-op has an elected board of directors, comprised of owners who reside in the building. The board is responsible for managing the affairs of the co-operative, supervising the property management company and, most importantly, for reviewing the applications of new owner/residents. The requirement of board or owner approval is one of the most unique characteristics of a co-operative. Even if the seller has agreed to sell you the unit, the board must review and approve your application and your financial ability to handle the responsibilities of membership in the co-operative in order for you to be allowed to buy a co-op unit.
Also, co-ops generally have rules governing uses of common areas like elevators and hallways, and governing your ability to do things which might affect your neighbors, like playing music, altering your unit, keeping pets, and renting out your unit.
Pros: Many of the most coveted, classic buildings in urban locales are co-ops. Think Fifth Avenue, NYC. This is a remnant of the owners' desire, historically, to have control over who can and can't buy and live in the building. Closing costs are usually lower than for the sale of other forms of property, because co-op sales don't generally incur government real estate transfer taxes or require full title searches of the public records.
Cons: The Board approval requirement can restrict your ability to buy and sell. Less privacy and a somewhat communal living atmosphere with rules and regulations impact how you live and use your property.
The In-Betweens: PUDs and Condos
No, Virginia, a Homeowner's Association (HOA) is not a support group. It is, though, a group into which you'll be drafted if you purchase a home that is part of a condominium development or a planned unit development. The term Homeowners' Association, or HOA, simply refers to the people who own units in a particular condominium development.
First, for clarity's sake, understand that the term condominium or "condo" refers to both a single unit you might buy and the legal form of ownership you acquire when you buy a unit.
Condos are similar to co-ops in that they are generally comprised of a number of attached residential homes in a building or a complex of buildings. However, the condo as a legal form can technically be applied even to detached residences on a single lot. Condos are most often stacked vertically, on top of one another, but this form of ownership is also frequently applied to townhouses, which are stacked next door to each other, sharing side walls but not ceilings or floors.
When you buy a condo, you become the exclusive owner of your living space -- usually called a unit -- and your parking space(s), while at the same time obtaining shared ownership with your neighbors of portions of the property called the "common area." Most often, the common area includes laundry areas (though some condos have in-unit laundry), community parking spaces, hallways or outdoor walkways, and recreational areas like greenbelts, clubhouses, pools, tennis courts, and gyms. In newer, larger and/or more progressive condo communities, you might even see an on-site business center with access to fax machines and the Internet, a DVD library with free popcorn and cookies, or the entire ground floor devoted to a public gym or supermarket. The common area also may include the four exterior walls, ceiling/roof, and sometimes the floor of an upstairs unit; maintenance problems in the walls or the roof are usually the Homeowners Association's responsibility to repair.
When you pay dues to the HOA, you pay for:
- Your homeowner's insurance (the HOA obtains insurance on the whole building, and just charges you for your share);
- Common area maintenance (landscaping, cleaning, repairs, improvements);
- Gas (sometimes - if gas lines are shared between units);
- Water (sometimes - if water heaters are shared between units).
The property flyer or MLS listing will generally specify the amount to be paid monthly to the HOA by the buyer of a particular unit, though these amounts do increase every year or so. Often, the property description will give a brief, bullet point explanation of costs covered or amenities paid for by the HOA dues.
Like co-ops, condo HOAs also elect boards of directors, but there are usually no provisions for the board to have input into who can buy a unit. Also, like co-ops, condos are usually managed by a property manager, and condo owners are subject to permanent covenants, codes and restrictions (CC&Rs) governing things like pets, alterations to units, items you may have on your balcony or porch, noise, and so on—basically, anything that might impact your neighbors' ability to enjoy their units.
Pros: You write fewer checks monthly, as many of your monthly costs are rolled into your HOA dues. Also, lots of potentially major unexpected repair costs are liable to be covered by your HOA. Between the HOA and a home warranty, you can drastically reduce your risk of big repair costs. Access to on-site recreational facilities and convenience amenities can be a big plus, if you use them.
Cons: Your HOA dues might be more expensive than the total of your water, gas, maintenance and insurance costs would be otherwise; the overage usually goes to pay the management company and to create a reserve fund for repairs and maintenance. Some HOAs don't manage money well, or are involved in major litigation that threatens the Association's ability to actually cover large dollar repairs and maintenance items. Other HOAs have deferred maintenance on the property, which can lead to expensive repairs down the line which you, as a member of the HOA, will have to help fund. If the reserves aren't healthy enough to finance a large repair, you could wind up being assessed a significant sum of money (translation: thousands of dollars) in addition to your monthly dues. Communal living is inherently less private, and condos that were converted from rental apartments often lack soundproofing. It's no fun to have to hear the guy upstairs flush the toilet or handle other unmentionables. You may need to seek approval for some interior upgrades or alterations.
Planned Unit Developments (PUDs)
PUDs are basically detached single family homes in a subdivision or other "master planned" community which offers amenities and benefits above and beyond those made available by the local municipal government. Similar to single family homes, the owner of a home in a PUD possesses exclusive ownership of the lot of land on which the building sits, the actual building, and everything within the four walls. The common areas in a PUD are generally streets and parking areas, community centers or clubhouses, parks and open spaces, and other recreational facilities.
The Homeowners' Association in a PUD usually does little more than hold title to these areas and retain a property manager to maintain and repair them. Individual owners are responsible for insuring and maintaining their homes and yards (though front yard maintenance can sometimes be an HOA responsibility), but are bound by relatively non-restrictive CC&Rs. Common examples of CC&Rs binding PUD home owners include limitations on exterior paint color, putting up basketball hoops over the garage, and prohibitions on vehicle parking in driveways and on streets. While HOA dues for PUDs are proportionally much lower than those for condos and co-ops, they generally cover nothing but common area maintenance. It is important to note that in many states, subdivisions less than 10 years old are generally PUDs, and owners therein are often required to pay special taxes or assessments intended to fund the increased burden the subdivision created on police, fire and other municipal services. If such a special tax applies, it will often be disclosed up front in the property listing or flyer. If you do not see it there, it is legally required to be disclosed within days after you make an offer.
Pros: This is just as private as living in a detached family home, but may have lower maintenance responsibilities. Communities have a uniform standard for aesthetics and maintenance, and contain no weird purple-and-orange-and-yellow houses. HOA dues are generally quite low.
Cons: Restrictions on paint colors and parking can be annoying. Uniform appearance standards can give the neighborhood a Stepford feel. HOA dues don't really substitute for any other costs you would have to pay if your home were not in a PUD.