What You Should Know about Special Types of Ownership for the Real Estate License Exam - dummies

What You Should Know about Special Types of Ownership for the Real Estate License Exam

By John A. Yoegel

There will be some questions on the Real Estate License Exam that ask about special types of ownership. Cooperatives and condominiums are popular forms of ownership for a variety of reasons, but primarily because they

  • Usually are built to a higher density, and they’re often somewhat less expensive than a single-family house in the same area.

  • Provide some of the advantages of homeownership, such as building up equity by paying off a mortgage, and tax advantages like being able to deduct real estate taxes and mortgage interest.

  • Provide the advantage of no outside maintenance, because the dwellings usually are maintained by a homeowners association in the case of condominiums or a board in the case of a cooperative.

These forms of ownership are unique because they involve ownership by more than one person, but the owners aren’t known to each other nor are they in a business venture together.

Cooperative ownership

Strictly speaking, you don’t own real estate when you’re part of a cooperative. You own shares in a corporation that owns the real estate. As a shareholder, you receive a proprietary lease that enables you to occupy your apartment. Your ownership interest in a cooperative is treated like real estate, including the ability to finance your purchase like a mortgage, except that your shares are collateral for the loan.

A board of directors of the corporation makes rules and policies for the building, collects monthly fees from shareholders and maintains the building, and pays the taxes and any other expenses that may exist, like emergency repairs and a mortgage on the building itself.

This mortgage on the building is generally referred to as the underlying mortgage and can sometimes make the monthly common charges a little more expensive than in a condominium because the share owners are responsible for payments on the underlying mortgage.

Two issues that frequently are considered disadvantages of cooperative ownership are

  • Shared liability. Whenever shareholders default on their common charges, the other shareholders are liable. This issue can become serious whenever too many shareholders default on their payments and the other shareholders have to pay the share of the money that wasn’t paid by the defaulting shareholders.

  • Cooperative board approval of newcomers. Requiring board approval of new cooperative buyers whenever someone sells shares in a cooperative is the fairly common practice. The requirement allows new owners to be screened for financial ability to pay their loans and common charges, but it also may hold up the sale of a unit while a prospective buyer undergoes the board approval process.

Cooperative boards in many places may not be required to reveal the reasons they turn down a specific buyer.

Condominium ownership

Condominium ownership is a form of group ownership that involves actually getting a deed to your individual ownership interest. In general, the deed describes the airspace you own, which you own as a tenant in severalty, and your share as a tenant in common of the land under and around your unit. A homeowners association usually collects set monthly fees, which pay for maintenance of the condominium building and complex.

Individual condo owners are responsible for paying their own property taxes, so defaulting on your tax obligations can result in a foreclosure on the unit but not on the entire complex. Condominiums often are associated with complexes in the suburbs and are thought of as low-rise one- and two-story attached housing units. Condominiums, however, may also be found in high-rise buildings in urban areas.

Find out what the term “townhouse” means in your home state. Originally a term used to describe two- or three-story attached housing in urban areas, townhouses now are usually located in planned unit developments.

Planned unit developments

The planned unit development (PUD) is a somewhat hybrid form of ownership. In theory, a PUD is a large development often having mixed uses, such as different types of residential and commercial uses, and built by a single developer. In practice, a PUD may have only residential uses. Like a condominium, PUDs often are overseen by a homeowners association, and common charges paid by the homeowners go for outside maintenance.

How a PUD often differs from a condominium is that the owner of a PUD unit also owns land beneath it. In a condominium, you own the unit individually but the land under and around it as a tenant in common with others. You usually own land in a PUD.

You also usually own so-called common areas like recreation facilities, walking paths, and the internal roads as a tenant in common with others, just like a condominium. You should find out how the term PUD is used in your home state with respect to developments and property ownership.

Time shares

In a time share, a person has either a fractional ownership in a property or the right to use a property for a limited period of time each year or both.

Ownership in a time share may actually convey a fee simple ownership interest in the property. You have unlimited rights to the extent of your ownership interest, even if that ownership interest is the last two weeks in August every year. A person with a time share use interest leaves ownership of the property in the hands of a corporation or an individual.