How to Avoid a Bad Condo or Co-Op

Editor's Note: As a special feature for April, TheStreet.com is offering a series of 20 stories on everything you need to know about real estate. Today's installment is part 10.

Co-ops and condos can be a good option for first-time homebuyers. They are also attractive alternatives for people who own a house but want to downsize because they don't need the space anymore. But while co-ops and condos generally cost less than free-standing houses and require less upkeep, there are still some potential pitfalls.

First, some definitions: When you buy a condominium, you get a deed and title to an apartment and contribute funds for the upkeep of common property such as the grounds, building exterior, lobby and elevators. Condo owners pay real estate taxes and in general can rent or sell as they wish.

With a co-op, you are buying stock in the company that owns a building. You don't actually own any real property, but the stock entitles you to a lease for a unit in the building. As with a condo, you contribute funds for the upkeep of common grounds, but your monthly fees also cover the real estate taxes and insurance for the building, among other things. Co-op boards also can restrict your ability to sublet your unit.

In either case, you are living at close quarters with other people in the building and may be subject to rules and policies you don't like, such as no pets or mandatory carpeting. Just as important, you will be co-mingling your finances with everyone else in the building, since co-op and condo owners may have to foot the bill if their neighbors fail to pay their monthly fees. It can also be harder for you to sell your unit if others in the building default on their mortgages.