Condos Explained

The condominium form of homeownership has been around since the 1950s, yet there still seems to be a good deal of confusion concerning the definition of the concept. And why not? We keep expanding, altering and twisting the idea of individual ownership of multi-unit buildings. The evolution began in the 1920s with the concept of the cooperative form, and since that time we have seen the growth of the condo, the PUD (Planned Unit Development), the town home, the condotel and more recently—just to add to the confusion—landominiums.

It can all be really confusing. To make matters worse, the term condominium has become a generic term used to describe all of these ownership forms, which I suppose is okay for everyday conversation, but from a legal and real estate financing perspective, it can be really misleading. The term condominium refers to a specific form of ownership that states that you have fee simple title to your unit in a multi-unit building and an undivided interest in the common areas. You own the interior of your apartment, but you don’t own the land that it sits on, rather an undivided interest in all of the common lands and amenities. For instance, if there are 20 units in your condominium and it has a pool and a tennis court, you have a 1/20th interest in the pool and tennis court; however, undivided means you can’t fence off a corner of the tennis court and call it yours. Since there are areas of common ownership, it is necessary to charge the owners a monthly maintenance fee to care for the property, and with this area of concern comes a need for some form of governance and management. All owners have something to say about the operation of the building, thus the governance and management simply becomes a practical necessity as you will need someone to hire and oversee building maintenance and improvement.

The cooperative is nearly the same thing from a mechanical perspective as a condo. There is still a need for some entity to operate the building, therefore requiring a maintenance fee. The major difference is in how the building is owned. In a condo, each unit owner has title to their unit and it is taxed and mortgaged separately from the others. In its truest form, a cooperative is owned as a corporate entity. The entire building is owned as a corporation, and each unit occupant owns a share of stock in the corporation which entitles them to occupy a unit. In its original form from the 1920s, each unit occupant was assessed their share of the building expenses which would not only include maintenance and perhaps utilities, but also their share of the mortgage payment and property taxes, which were both expenses of the building as a whole.

You can readily see why this concept became unpopular, particularly looking at it in its place in history. If there are 20 corporate shareholders in the building, the building expenses would have been divided by 20 and each shareholder would receive his or her assessment. Now let’s go back to the late 1920s during the Depression—what if half the shareholders couldn’t pay their assessments? What normally happens when a homeowner can’t pay the mortgage? Foreclosure—only now we are foreclosing on the entire building, affecting both those who paid their assessments and those who could not. Harsh, no?

Today’s cooperatives resemble condos in many ways; most importantly, they can be individually mortgaged, putting to rest the fear that an entire building could end up on the sheriff’s auction block because numerous occupants couldn’t pay. Yet it hasn’t really been revived as a popular form of ownership—in the greater Pittsburgh area there are a few, but the vast majority of occupant ownership of multi-family structures is accomplished through the condo concept.

How about the townhome? This really shouldn’t be included in this discussion at all, except that there is some level of confusion concerning how these properties are owned. The townhouse is a construction style—not an ownership form, and therefore could be a condo or not.

Do you own the land on which your unit sits? If you own it, it’s not a condo.

Now what about a Planned Unit Development (PUD)? This is an attempt by the PUD’s developer to control the character and nature of the development as a whole. Unlike the traditional development in which you purchase a lot and then (within certain restrictions) build the home of your dreams, in a PUD you are building the home of a developer’s dreams. Homes are built following strict parameters set by the developer. There may be mixed use within the community, but it is usually designed in a very thoughtful way. There may be a core of quad homes surrounded by a ring of single family detached houses, with some townhomes on the fringe. Chances are good that you will own the ground your unit sits on and due to the many common elements found in PUDs, there is likely a maintenance fee and an owners’ association to govern the PUD.

A final word of caution. Make sure that you know whether you are buying a condo, a co-op or a PUD, and make certain your lender understands what you are buying as the financing can be different. Depending upon the age of the development and number of units sold, financing may be quite difficult.

Gary Straub is an independent real estate consultant who has been a real estate professional for 36 years.