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Housing Cooperatives: What to Know About Co-Ops Before You Buy

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In the minds of most Americans -- especially first-time home buyers -- there are two options when it comes to housing -- buy a home or rent one. Both have their advantages and disadvantages depending on the circumstances.

In certain urban areas -- especially the New York City market -- there's a third alternative to single-family homes known as a housing cooperative or co-op. Housing cooperatives combine some of the benefits and drawbacks of both owning and renting. In this article, we'll take a closer look at what a housing co-op is, the pros and cons of this type of arrangement, and whether it could be the best fit for you.

What is a housing cooperative?

A housing cooperative is a type of real estate that is collectively owned by all its residents. Instead of buying an individual condominium unit, to buy a co-op unit, one must buy shares in the entire building. In simple terms, you aren't actually buying real estate. You're buying the exclusive right to occupy a particular housing unit that is owned by all the residents of a building.

In a co-op, the building is owned by a nonprofit corporation. Each resident buys shares in the corporation, in an amount proportional to the size and relative value of the unit they are living in. For example, a co-op resident with a 1,000 square-foot unit could expect to buy about twice as many shares as someone with a 500 square-foot unit. Someone with a high-floor unit and a beautiful view can expect to buy more than a resident on a lower floor without an attractive view.

How does a housing co-op work?

As mentioned, a housing co-op consists of a collection of housing units owned by a non-profit corporation. The co-op's residents are the shareholders. In exchange for buying shares, residents get the exclusive rights to use one of the housing units as well as the common areas of the property.

Like a condominium, co-op residents typically have to pay recurring dues to the co-op association. These cover common area maintenance, shared amenities, and other operating costs of the property. Residents of the co-op community are still responsible for obtaining insurance coverage for their personal property. Insurance for the building itself is typically covered in the association fees. The biggest difference between condos and co-ops from an owner's perspective is that a condo is a form of real estate you can buy -- a co-op isn't.

Another big difference is how particular the associations of condos and co-ops can be. Condo associations are typically not allowed to discriminate against potential owners. However, co-op boards can, especially when it comes to buyers' financial condition. For example, a co-op might require a background check, financial statements, and more. Many have formal vetting processes for prospective residents.

Finally, remember that all of the units are owned by the co-op corporation. So, permanent modifications to the interior of each unit are generally not allowed. This can also be a good thing. The co-op corporation is typically responsible for maintaining appliances and other fixtures. This is a co-op feature that is more like renting an apartment than owning a home.

Types of co-ops

All co-ops have the same general ownership structure as described in the previous two sections. However, the procedure for re-selling shares in a co-op can differ. Specifically, there are three different types of co-op structures when it comes to how residents build equity:

Market rate co-op: Residents can sell their shares to another buyer at whatever the current market value is. This is the closest arrangement you'll find to traditional condominium sales in the co-op world.

Limited equity co-op: A limited equity cooperative (LEC), has restrictions when it comes to how much profit a share owner can earn when selling. LECs are generally designed to provide affordable housing to the initial residents. And they also aim to keep ownership affordable as residents come and go over time. For example, an LEC might have a set resale formula that adjusts the initial share price higher by 2% per year, no matter what the real estate market does.

Group equity co-op: Shareholders don't build equity at all. Instead, their initial capital contribution is returned when they move out. This arrangement typically has the most affordable initial buy-in. However, it is not too different in practice from simply renting an apartment and placing a deposit.

Getting a mortgage loan for a co-op

It's entirely possible to get a mortgage loan to buy into a co-op, but it works a bit differently than obtaining a mortgage for a home you own. Since you're technically not buying any actual real estate, a bank can't take possession of and re-sell your unit. If you don't pay, the lender's only recourse would be to take possession of your co-op shares. For this reason, co-op buyers can obtain a type of mortgage known as a share loan.

In practice, a share loan works the same as an ordinary mortgage, which you can learn about with our beginner's guide to home loans. Your lender will verify your credit, income, and assets. Then, the lender will examine the financial stability of the co-op association (very similar to the condo mortgage process).

But it is technically a different kind of lending instrument. From a buyer's perspective, the biggest challenge is finding a lender that offers share loans, as not all banks do. There are some that specialize in share loans, and many will only make share loans in the New York area, since that's where co-ops are most common. Rocket Mortgage is an example from our list of best mortgage lenders that offers co-op share loans. But they only loan on market rate co-ops that are located in areas of New York where co-ops are common.

Special considerations for housing cooperatives

All co-ops have a somewhat restrictive nature when it comes to resident freedom. And the non-profit nature of co-op corporations means there isn't a developer looking to make money. So, buying into a co-op will typically get you more home for your money than buying a condo. If you're planning to finance, you can use this mortgage calculator to see how much a particular co-op might cost per month.

Having said that, the million-dollar question is whether co-op living is too restrictive for you. As mentioned, you typically cannot modify the inside of a co-op unit. The co-op's board of directors generally has to approve any sale of a resident's shares. And, rentals are generally prohibited in co-ops.

The bottom line is that a co-op is certainly a housing option worth considering. There are some good housing cooperative benefits to take advantage of if you're planning to move to an area where this type of housing is common. But a co-op is a very unique type of property, and buyers should carefully weigh the pros and cons before deciding if co-op living is right for them.

Still have questions?

Here are some other questions we've answered:

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  • A housing cooperative, or co-op, is a type of real estate where a group of residential units are collectively owned by a non-profit corporation. Residents buy shares of the corporation for the privilege of using one of the units, but co-op residents are not homeowners in the traditional sense.

  • There are a few key differences, but the biggest is ownership structure. When you buy a condo, you own the unit. On the other hand, when you buy into a co-op, you are buying shares in the co-op association, which collectively owns all of the units. Because co-op residents don't technically own the units, they are typically prohibited from making interior modifications and renting their units to tenants, both of which are allowed in most condominiums, at least to some degree.

  • It depends. Since co-ops aren't forms of real estate ownership, certain banks may offer a type of loan product called a share loan specifically for co-op buyers. However, banks will typically only make share loans on market rate co-ops, and only in areas where co-ops are common.

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