A Better Way to Compare Co-op and Condo Prices

As every real-estate buyer knows, shopping for any sort of home can be complex, and more so when looking for a co-op or a condo, where there are additional layers of ownership complexity beyond the simple buy-and-move-in that applies to houses. Exacerbating the situation, however, is the fact that price comparisons tell you almost nothing about which apartments are too expensive and which are great buys. Price per square foot, which are often referenced, doesn’t help. Projected monthly cost, which you see on sites like Streeteasy.com, is an improvement, but still not quite there. We need a better measure, and we’ll derive one here.

The Problem

Which of the two-bedroom Elmhurst-Jackson Heights apartments listed in Table 1, real-life listings active on the Long Island MLS just a couple of days ago (addresses disguised) seem to be attractively priced and which sellers seem aggressive? (We’re looking at these apartments relative to one another. We typically expect to negotiate, but an early read on how a property is priced in the context of the overall market is an important starting point.)

Table 1

Apartment	Type	Beds	Baths	Asking Price	Condos		Co-op Maintenance
					Common Charges	Real Estate Tax
Unit A	Condo	2	2	499,900	284	291	– –
Unit B	Condo	2	1	546,000	350	200	– –
Unit C	Condo	2	1.5	625,000	210	283	– –
Unit D	Co-op	2	1	279,888	– –	– –	842
Unit E	Co-op	2	2	795,000	– –	– –	801
Unit F	Co-op	2	1	579,000	– –	– –	1,078

 Unit D obviously catches our attention. The monthly maintenance is on the high side, but the asking price seems irresistibly low, certainly if one is willing to deal with the issues of co-op ownership. It has only one bathroom. Others have more. But oh, those asking prices. Unit D really sticks out.

Any capable real estate agent would caution a prospective buyer against immediately going all out for D. The monthly obligations (maintenance for the co-ops, common charges and real estate taxes for the condos) are important and vary considerably. Also, the tax implications of owning co-ops and condos differ and this can add up a lot in real dollars and cents.

The potential after-tax ownership costs for all can easily be computed, especially if the agent has created and saved an Excel spreadsheet. Not all do this, however.

But even this is limited. Although we can easily see the true cost of any unit, how can we compare it to others in the marketplace? Yet we must do that in order to evaluate asking prices and buyer offers.

Introducing SMAC

To address the complexities of comparing co-op and condo valuations, I called on my inner geek and created SMAC, which stands for Standardized Monthly Apartment Cost.

The idea, here, is to translate the net cost of apartment ownership into a single monthly figure that accounts for mortgage payments, maintenance or common charges, real estate taxes, and the impact of tax breaks. It doesn’t matter whether there’s a mortgage on the building itself (as there usually is for coops but not for condos) or whether the real estate tax is paid directly by the resident (as is the case with condos) or indirectly as part of co-op maintenance. I also adjust the figures according to a simple scoring system based on room configuration. All the differentiating is done by my model, under the hood so to speak.

The end result, the SMAC figure, represents the actual after-tax monthly cost of ownership, and is directly comparable among all apartments.

Financial Assumptions

To implement SMAC, I have to make quite a few assumptions, pretty much all of which are highly debatable. Interestingly, though, when analyzing data, precision is often not the way to go, which is just as well because it’s unattainable in many respects. The secret sauce, however, is the mantra that “it is better to be vaguely right than exactly wrong” (from Chapter 22 of British philosopher-logician Carveth Read 1898 work Logic). That principle has severed me over several decades in the stock market and it works in real estate too.

What’s most important, more often than not, is uniformity regarding key assumptions. For example, my numbers presently assume all buyers are paying 25% down and financing their purchases with 30-year mortgages at a rate of 4.75%. An assumption of 25% down is probably realistic more often than not, but in real life, many buyers will pay more than 4.75% and have their mortgages mature in less than 30 years.

When I work with an individual client, I’ll customize based on assumptions that are most realistic for that client’s specific situation. For general market analysis, though, consistency is what’s most important.

Here is the summary of the financial assumption I currently use for comparisons.

• Down Payment: 25%
• Mortgage Term: 30 years
• Mortgage Interest Rate: 4.75%
• Personal Tax Bracket of Apartment Owner: 30%
• Percent of Co-op Maintenance that is tax deductible (i.e. For real estate tax and interest on building mortgage): 56%

Scoring the Apartment

In much of real estate, reference is made to price-per-square foot. For present purposes, the pros and cons of this measure are not relevant because most co-ops do not report square footage. The reasoning is naive: Supposedly, it’s because you’re buying corporate shares, not real property. Actually, though, you’re not buying any old corporate shares. This isn’t Apple, or Microsoft. Co-op shares are special legal creatures that entitle you, not to dividends (as with the likes of Apple and Microsoft of the world), but to a proprietary lease giving you exclusive right to occupy specific square footage. But right or wrong, we’re stuck with widespread absence of co-op square footage from real-estate databases.

So rather than throw up our hands because we can’t be exact, let’s choose to be vaguely right. I’ll count rooms instead of square feet.

Interestingly, though some testing I’ve done suggest rents and prices aren’t necessarily sensitive to differences in complete room counts. Variations in the number of bedrooms and bathrooms matter most since living rooms, dining “areas,” and kitchens are pretty much available across the board (i.e., we can control for them).

Studios present an interesting challenge. Should I call the main living space a living room and assume zero flor the number of bedrooms? Or should I count it as one bedroom and let the market price mechanism adjust for the absence of a separate living room? My research to date suggest the latter (scoring the main room as if it were a bedroom) bears a better statistical relationship to prices, even though aesthetically and judgmentally, the matter it is highly debatable.

Another interesting aspect of the dynamic between room count and pricing is that each bathroom matters less than each bedroom. I made a major judgment call by assigning each bedroom a score of 1.00 and each bathroom a score of 0.65. That’s for the overall market model. For an individual client shopping for an individual apartment, I customize the scoring based on the client’s tastes.

Building the SMAC

Everything derives from the flow of funds through a residential apartment situation, as detailed in my 2/18/17 post and as summarized in Table 2 which is reproduced here from that article.

Table 2

	Monthly Payments for Apartment – Basic Analysis
	Tenant- Renter	Condo Owner	Co-op Shareholder
Total $ per month	2,380.95	2,249.72	2,249.72
What it consists of . . .
Operating Expenses	1,047.62	1,047.62	1,047.62
Real Estate Tax	500.00	500.00	500.00
Payment for Building Mortgage	351.05	0.00	351.05
Payment for Resident’s Mortgage	0.00	702.10	351.05
Landlord’s Profit	482.28	0.00	0.00

We’re not going to be working with the Tenant-Renter column (SMAC isn’t really needed since it’s easy enough to compare stated rents for comparably-configured apartments). To get from Table 2 to SMAC involves:

• Being specific about the purchase prices and the resulting mortgage costs for individual apartments at specific prices
• Being specific about condo real estate taxes, which are reported in real estate databases
• Being specific, if possible, with the percent of co-op maintenance allocable to real estate tax and interest on the building mortgage or if that is not feasible because the data is incomplete (as is often the case), substituting a ballpark across-the-board assumption
• Recomputing tax-advantaged items to reflect the lower “after tax” cost to the resident.
• Dividing the overall cost by the apartment’s room score (1.00 pr bedroom and 0.65 per bathroom)

Tables 3 and 4 demonstrate the process for Unit B, one of the real-life condos listed in Table 1, without yet making the room-score adjustment; this preliminary SMAC is labeled Net (After Tax). Recall that in all cases, I’m assuming a 30% marginal tax rate for each resident; when working with a specific client, this would have to be customized. 

Table 3 – Unit B (Condo)

	Monthly Cost	Tax Benefit?
Common  Charge	350	No
Real Estate Tax	200	Yes
Resident’s Mortgage	2,136	Interest only
TOTAL	2,686

Table 4 – Unit B  (Condo)

	Gross (Pretax)	Net (After Tax)
Common  Charge	350	350
Real Estate Tax	200	140
Resident’s Mortgage –  for Principal	515	515
Resident’s Mortgage – for Interest	1,621	1,135
TOTAL	2686	2140

 Tables 5 and 6 do the same thing but for one of the co-ops, Unit D.

Table 5 – Unit D  (Co-op)

	Monthly Cost	Tax Benefit?
Maintenance	842	Partial
Resident’s Mortgage	1,095	Interest only
TOTAL	1,937

Table 6 – Unit D (Co-op)

	Gross (Pretax)	Net (After Tax)
Maintenance allocated to operating expense	371	371
Maintenance allocated to R.E. tax and interest on bldg. mortgage	471	330
Resident’s Mortgage –  for Principal	264	264
Resident’s Mortgage – for Interest	831	582
TOTAL	1,937	1,547

Tables 7 and 8 show the information for all apartments. 

Table 7

Apartment	Type	Beds	Baths	Asking Price	Total Monthly Cost
					Gross (Pretax)	Net (After Tax)
Unit A	Condo	2	2	499,900	2,531	1,999
Unit B	Condo	2	1	546,000	2,686	2,139
Unit C	Condo	2	1.5	625,000	2,939	2,297
Unit D	Co-op	2	1	279,888	1,937	1,546
Unit E	Co-op	2	2	795,000	3,911	3,069
Unit F	Co-op	2	1	579,000	3,343	2,647

Table 8

Apartment	Type	Beds	Baths	Asking Price	Total Monthly Cost		Adjusted for Room Count
					Gross (Pretax)	Net (After Tax)
Unit A	Condo	2	2	499,900	2,531	1,999	606
Unit B	Condo	2	1	546,000	2,686	2,139	807
Unit C	Condo	2	1.5	625,000	2,939	2,297	772
Unit D	Co-op	2	1	279,888	1,937	1,546	583
Unit E	Co-op	2	2	795,000	3,911	3,069	930
Unit F	Co-op	2	1	579,000	3,343	2,647	999

 Sample Comparisons

Let’s now take SMAC for some real-world test drives.

Tables 9 and 10 gets us started by comparig two condos, Units B and C.

Table 9 (Comparing two condos)

Apartment	Type	Beds	Baths	Asking Price	Monthly Charges
					Common Charges	Real Estate Tax
Unit B	Condo	2	1	546,000	350	200
Unit C	Condo	2	1.5	625,000	210	283

Table 10 (Comparing two condos)

Apartment	Type	Beds	Baths	Asking Price	Total Monthly Cost		SMAC: Adjusted for Room Count
					Gross (Pretax)	Net (After Tax)
Unit B	Condo	2	1	546,000	2,686	2,139	807
Unit C	Condo	2	1.5	625,000	2,939	2,297	772

Notice that based on price alone, Unit B looks significantly cheaper. Intuitively, we assume the absence of the extra half bathroom matters. But is that enough to account for the $79,000 difference in asking price?

SMAC makes clear it isn’t. It tells us that the Unit C, with its 772 SMAC is cheaper despite its much higher asking price. The $140 per month difference in the common charge is what does it.

At first glance, one might expect Unit B’s significantly lower real estate tax burden to offset much of the difference in common charges. But recall that real estate taxes can be used as deductions when computing the owner’s personal taxes. That’s not so with condo common charges. So Unit C is a lot lower in the category that packs more punch.

Some of the benefits of SMAC are available on StreetEasy.com listings, which include estimates of monthly costs. But these do not take tax benefits into account. StreetEasy would continue to suggest Unit B is cheaper since it is the pone with the lower gross (pretax) monthly cost.

Table 11 performs the same sort of comparison with two co-ops, Units E and F.

Table 11 (Comparing two co-ops)

Apartment	Type	Beds	Baths	Asking Price	Co-op Maintenance
Unit E	Co-op	2	2	795,000	801
Unit F	Co-op	2	1	579,000	1,078

Table 12 (Comparing two co-ops)

Apartment	Type	Beds	Baths	Asking Price	Total Monthly Cost		Adjusted for Room Count
					Gross (Pretax)	Net (After Tax)
Unit E	Co-op	2	2	795,000	3,911	3,069	930
Unit F	Co-op	2	1	579,000	3,343	2,647	999

Here, SMAC shows us that Unit E, despite its much higher $795,000 asking price, is actually a bit cheaper than Unit F for which the seller is asking only $579,000. The latter’s much higher maintenance is a big drain and remains so even after we take tax deductibility into account.

Next, Tables 13 an d 14 compare a co-op to a condo; Units A and D.

Table 13 (Comparing a condo to a co-op)

Apartment	Type	Beds	Baths	Asking Price	Condos		Co-op Maintenance
					Common Charges	Real Estate Tax
Unit A	Condo	2	2	499,900	284	291	– –
Unit D	Co-op	2	1	279,888	– –	– –	842

Table 14 (Comparing a condo to a co-op)

Apartment	Type	Beds	Baths	Asking Price	Total Monthly Cost		Adjusted for Room Count
					Gross (Pretax)	Net (After Tax)
Unit A	Condo	2	2	499,900	2,531	1,999	606
Unit D	Co-op	2	1	279,888	1,937	1,546	583

Here, the unit that looks cheaper, Unit D, really is less expensive. But the gap is not as wide as the difference in purchase prices suggest. In fact, a buyer who is nervous about the greater number of rules that apply to co-ops and the need to be subject to sometimes aggressive co-op boards might choose to pass on D in favor of A if he or she can muster the higher down payment.  So much the better if the buyer can negotiate Unit A’s $499,000 asking price down.

Summary

Tables 15 and 16 reproduce basic data and SMACs for all apartments. Both are presented to facilitate comparative review under each set of criteria.

Table 15

Apartment	Type	Beds	Baths	Asking Price	Condos		Co-op Maintenance
					Common Charges	Real Estate Tax
Unit A	Condo	2	2	499,900	284	291	– –
Unit B	Condo	2	1	546,000	350	200	– –
Unit C	Condo	2	1.5	625,000	210	283	– –
Unit D	Co-op	2	1	279,888	– –	– –	842
Unit E	Co-op	2	2	795,000	– –	– –	801
Unit F	Co-op	2	1	579,000	– –	– –	1,078

Table 16

Apartment	Type	Beds	Baths	Asking Price	Total Monthly Cost		Adjusted for Room Count
					Gross (Pretax)	Net (After Tax)
Unit A	Condo	2	2	499,900	2,531	1,999	606
Unit B	Condo	2	1	546,000	2,686	2,139	807
Unit C	Condo	2	1.5	625,000	2,939	2,297	772
Unit D	Co-op	2	1	279,888	1,937	1,546	583
Unit E	Co-op	2	2	795,000	3,911	3,069	930
Unit F	Co-op	2	1	579,000	3,343	2,647	999

Limitations

Obviously, people differ. An individual using SMAC would have to personalize the core assumptions. For example, the higher the tax bracket, the greater the difference the tax breaks will make and that can produce significant SMAC differences. If interest rates move significantly upward, that will influence changes in important SMAC components. And so forth.

Also, and perhaps even more obviously, choosing a home is not just about numbers. Data cannot reflect how one feels about the appearance of the building, the neighborhood, the view, the building’s amenities, and so forth. So apartment buying can and should never be reduced to sorting SMACs from low to high and fixating on the lowest numbers

But Tables such as 16, especially if columns for condo costs (common chargers and real estate tax) and co-op maintenance are added to provide visibility into why SMACs differ from one another, provide valuable picture of local markets and powerful bases for comparison and price negotiation.