As subject matter experts on Project Reviews, we have often been invited as guest speakers to discuss the topic of project types and how they differ. Being outside the scope of their usual credit review, this subject is always of interest to curious underwriters of all experience levels. PUDs, condos, and especially co-ops, are exotic and slightly mysterious. Even underwriters who review loans in these project types regularly may not really know what they are or how they differ. During our most recent training session, the attendees were especially excited to learn this stuff. It may have been our slick PowerPoint presentation or it may have been the french presses full of coffee on some of their desks that had them so amped for the class. We like to think it was the former, but maybe go make yourself a cup of coffee before reading on, just in case…
PUDs, Condominiums, and Co-ops are all just different legal classifications for methods of home ownership. Each one requires the filing of certain legal documents in order to establish itself as a specific project type. PUDs and condos both require a Declaration of Covenants, Conditions, and Restrictions (referred to as either the Declaration or the CC&Rs). For PUDs this is a Planned Unit Development Declaration and for condos it’s a Condominium Declaration. Co-ops, being corporations, require the filing of Articles of Incorporation.
A PUD, or Planned Unit Development, can consist of either attached or detached units, but either way, a PUD is just a project or subdivision that consists of two types of property. The first type of property is the residential units, which are entirely owned by the residents, interior and exterior. The unit owners also own the ground beneath the unit and may own plots of land surrounding their unit. The second type of property is any common areas owned by the HOA (Home Owners Association). These common areas are maintained exclusively for the benefit and use of the individual PUD unit owners, meaning they are not open to the public. The HOA requires membership from all unit owners, which may include mandatory regular assessments (HOA dues).
PUD Pros and Cons
Pros: Owning your entire home outright while living in a managed community that sets standards for upkeep to keep property values high. The HOA will maintain the common areas shared by all residents with the aim of making the neighborhood a pleasant place to live for everybody.
Cons: Mandatory HOA dues and HOAs can be difficult to deal with if not run well
Condominiums are similar to PUDs in several ways and it can be difficult to determine whether a project is a PUD or a condo without checking the Declaration or property legal description in the title report. Both project types are made up of residential units and common areas. Both have HOAs that require mandatory membership and collect maintenance assessments. And both can be made up of either attached or detached units. The main difference between a PUD and a condo is that in a condominium project, the HOA owns all the land the units sit upon as well as the exteriors of all the units. When buying a condo unit, you are purchasing what is referred to as “Walls-In”. The HOA’s definition of Walls-In is spelled out in the declaration and bylaws of the project, but usually means anything inside the backside of the drywall on the walls and ceiling and the top of the sub-floor beneath the flooring. This gives the unit owner possession of the drywall, flooring, and all fixtures inside the unit, making them responsible for any repair and upkeep of those items. Meanwhile, the HOA owns and is responsible for maintaining the exterior walls, roof, landscaping, rough plumbing, and electrical. Unlike a PUD, owning a condominium unit gives you a specific percentage of undivided interest in all the common areas, including the unit exteriors. Percentage of interest can either be portioned out by number of units (so owning 1 of 10 units in a project would give you 10% interest) or by square footage of your unit. The interest breakdown is disclosed in the Declaration as part of the legal filing of the project.
Condominium Pros and Cons
Pros: Not responsible for maintenance or repair of unit exterior. Condos are generally less expensive to buy than a single family home. Some condo projects offer desirable amenities for unit owners.
Cons: Mandatory HOA dues and HOAs can be difficult to deal with if not run well. It may be more difficult to buy or sell your unit as the project itself requires approval from the bank along with borrower’s credit approval.
Cooperatives, or co-ops, are a truly unique form of residential ownership that only exists in a few states in the Northeast, mostly New York and New Jersey. The physical structure is indistinguishable from any other apartment building, but the true magic and mystery all happens on paper. When you purchase a co-op, you are not actually buying the physical unit, not even “Walls-In” like in a condo. What you are actually purchasing is shares in a corporation. Those shares are linked to the residency rights to your specific unit and along with a stock certificate, you are issued a proprietary lease or occupancy agreement giving you permission to reside in that unit. The corporation owns the land and building(s) that make up the co-op and is overseen by a board of directors selected from the stock holders that make decisions regarding the governance of the property. Unlike a condo or a PUD, when purchasing a co-op there is no mortgage recorded with the county. The bank’s lien is recorded as a UCC-1 filing, a legal form that a creditor files to give notice that it has or may have an interest in the personal property of a debtor.
Cooperative Pros and Cons
Pros: No real estate tax required upon purchase. Co-ops are generally less expensive to buy than a single family home or comparable condo unit. Some co-op projects offer desirable amenities for residents.
Cons: Mandatory maintenance assessments. Co-op boards are notoriously difficult to deal with – most require board approval of any potential purchasers. It may be more difficult to buy or sell your unit as the project itself requires approval from the bank along with borrower’s credit approval.
PUDs, condos, and co-ops are all very different project types with distinct characteristics and review requirements. While co-ops only exist in a specific area of the country, PUDs and condos are everywhere and it helps to know what they are and how they work. Hopefully, we’ve been able to give you a quick look at each one and remove some of the mystery.