What Is a Co-op and Is It Right for Me? Here’s Everything You Need to Know

You’ve finally decided to purchase your first home and you have your sights set on a place in the city! But as you’re contemplating a condo vs. a townhouse, you see a new affordable listing for a housing co-op. It sounds intriguing, but you wonder,  “what exactly is a co-op?” and, secondly, “there’s no way this type of home is even popular.”

It turns out over 1.5 million people in the United States live in a housing co-op, and the concept has been around since the 19th century. Housing co-ops, also known as housing cooperatives or cooperative housing, are an alternative to homebuying where residents own a share of their community-controlled complex instead of actual real estate. While it can provide affordable living and less maintenance, co-ops may be harder to get into, and they can come with quite a few rules and regulations.

So is that co-op right for you? We’ve talked with a veteran real estate agent near a co-op hot spot and scoured pages of research to bring you everything you need to know on the non-traditional process before you jump in.

What is a housing co-op?

A housing co-op is a multi-unit tenement or complex where residents jointly own space and control the entire building. Instead of owning your unit outright, you own a share of stock or interest in your building and become a shareholder in the community. So, that means in lieu of a deed to your home — as you would have with a condo or single-family home — you have a membership contract or lease to occupy your dwelling.

Picture a multi-unit apartment building. Instead of all the residents paying rent to a landlord or management company, all the residents own the structure together as part of a corporation. They each own a share of the complex, which gives them the right to their individual unit and all the common areas. The number of shares you get is relative to the size of your unit. That’s essentially what a housing co-op is at a very basic level.

Depending on the co-op’s size, an elected board of directors (made up of residents) may run the complex and provide all the rules and regulations. They also handle all the financials and management operations. Or, if the building is small enough, the residents run the day-to-day activities themselves. Either way, there’s more of a community-centric focus and lifestyle compared to more traditional residences.

Sound confusing? It can be at first, but that’s why it’s essential to know all of your facts about co-ops, including the different types, before making any decisions.

Different types of co-ops

• Market-rate: One of the more common types of co-op, the buying and selling of these units are just like any other property. You can purchase or sell shares at any price in the market, and you build equity (or make money off a sale) just like a normal transaction with a condo or single-family home.
• Limited-equity: This is another popular type of co-op, and it’s geared for affordable living. There are more restrictions on the prices at which units are bought and sold. As the name suggests, you can still build equity in these co-ops, but there are more rules you need to follow to keep the prices low for yourself and future residents.
• Zero equity/group equity/leasing co-ops: A housing cooperative in which the co-op leases (instead of owns) the building. Because the corporation is renting from whoever owns the building, there’s no equity to be built. However, these co-ops are usually still run the same way as the other types.

Where are co-ops found?

Housing co-ops are found throughout the U.S., but they are most commonly located in the Rust Belt; major cities, such as San Francisco and Fort Lauderdale; and the Northeast. In fact, New York City itself accounts for about half of all the housing co-ops in the country, according to Co-operative Housing International.

While most co-ops are mid-rise or high-rise building complexes, a housing cooperative can take any shape and form. Here’s a look at what you might find.

• Apartments, including those in mid-rise or high-rise buildings
• Garden apartments
• Townhomes
• Single-family homes
• Student housing
• Special-needs housing
• Senior housing
• Artist co-ops
• Mobile home parks

What’s different about buying a co-op?

Like a co-op lifestyle may be different from other housing developments, so is the purchase process. The most significant difference is there’s usually an application required to get in. But before you have flashbacks to your college entrance process, let’s take a closer look at the timeline you can expect to see.

Home search and offer

This step is actually pretty standard, but it’s important to work with a real estate agent who has experience with co-ops. They will be invaluable during your home search, guiding you through what questions to ask and how different co-op boards of directors compare to each other. As for the offer, it’s similar to the process in condos and single-family homes as well. You’ll need a pre-approval letter if you’re getting a share loan (more on this in a minute), and you will gather all necessary documents (offer letter, purchase agreement, etc.) alongside your agent.

If your offer is accepted, be prepared to put together an extensive package of documents, including information on your financial and housing history, for board approval.

Co-op application

The exact process to get into a housing co-op will vary, depending on the cooperative itself and your location. However, there’s usually an extensive amount of paperwork where you’ll have to provide many personal details. After that, you’ll also be asked to interview with the co-op’s board of directors.

The interview could range from a simple formality to a lengthy back and forth, but remember, the board just wants to make sure you’ll be a good fit for the community, and you know exactly what’s required for the cooperative. Some example questions they might ask:

• Why you want to live in the co-op or that location
• What your employment history is and if your job is secure
• What your finances and financial history look like
• If you plan to have guests over frequently
• If you plan to make any renovations to your unit
• If any hobbies or lifestyle habits might cause issues in the building
• Questions to make sure your application and interview line up

The board may have legal grounds to reject your application based on financial issues, employment troubles, or even an unwillingness to follow the rules and regulations. However, since the Fair Housing Act, they can’t reject you based on age, race, sex, familial status, disability, or other discriminatory factors.

Overall, the board of directors wants to make sure you’re going to mesh well with the other residents, and you’ll pull your own weight. Plus, this is a great opportunity for you to figure out if the co-op — and it’s management — is a good fit for your needs!

Financing a co-op

You’re through the application, and you have all green lights to purchase your shares in the co-op (woohoo!). Now there are a few things to know about financing.

It’s not much different from buying a conventional property. However, you’ll have to get a co-op mortgage loan, also known as a share loan. These allow the purchaser to buy shares of the cooperative instead of buying the property itself.

It’s important to note that not all lenders provide these loans. If they do, you might be limited to purchasing in a market-rate co-op. This is because it’s easier for the bank to base the value of the loan on your market-based purchase price (as opposed to limited-equity co-ops, where the purchase price is capped).

The initial steps to receive a share loan are pretty standard. The lender will look into the details of the co-op, including the building’s age, size, management, and recent sale prices. They’ll also dive into its finances, examining the co-op’s cash reserves as well as the underlying mortgage (if it has one).

For the purchaser there may be a little more work, says Ed Verdel, a New Jersey-based real estate agent with over 11 years of experience. He says some co-ops or loan providers may require a 20% or more down payment before a purchase, and you might have to prove you have more cash in savings. On top of that, there might be more strict requirements on your debt-to-income ratio.

“Financially, it’s a little bit harder to get in than it would be into any other sort of purchase,” Verdel says.

This is also a good time to look into the co-op’s monthly fee, usually known as a maintenance fee. This can be higher than traditional condo associations, says Verdel, and it may be a burden. However, the fee covers communal expenses (repairs, landscaping, taxes, etc.), so that means you won’t have to do any of the work outside of your unit.

There also might be an underlying mortgage on the building itself, which the cooperative takes care of. If so, you might be responsible for a share of the cost, which adds to the maintenance fee.

Living in a co-op

A housing cooperative may be right up your alley, or it could be the farthest thing from what you’re looking for. To find out, let’s take a look at some of the advantages and disadvantages.

Advantages

Affordability

One of the most significant advantages of a co-op is its affordability, especially in limited-equity types. These co-ops provide affordable housing to low- or middle-income homebuyers and allow buyers to purchase in an area that might be out of reach going the conventional route.

Even outside limited-equity co-ops, the purchase price is usually lower for other types of co-ops since they might not have the amenities you find elsewhere. On top of that, you’ll save money on closing costs. You won’t need to pay for all the same fees as in a traditional transaction, like title insurance or a mortgage recording tax.

Another plus: You won’t have to pay expensive, individual real estate taxes like on a condo or single-family home. Since the building is owned by the co-op, the complex is taxed as a single unit; you’ll just have to pay a share of the bill, which is included in the maintenance fee.

Community-focused

When you purchase a co-op unit, you’re investing in a community. Everyone has a real stake in their building. That means you’ll get to know your neighbors well, and you’ll have a real say in the operations of the cooperative.

Plus, because the vetting process is so detailed and requirements are so strict, co-ops are usually more financially stable. If it’s well-run, the cooperative will most likely have a larger reserve fund, and their owners are less likely to go into default in down markets. That was the case in 2007, when the Great Recession didn’t hit co-ops as hard as other real estate properties.

Less maintenance

Since co-ops are so community-focused, everyone pitches in. Maintenance fees cover all the communal expenses, and you shouldn’t have to worry about repairs, security costs, landscaping, and other maintenance woes, at least in the common areas. That means one less thing for you to worry about in homeownership, which may be especially great for older buyers.

In smaller co-ops, you might still be responsible for some communal maintenance, but if so, your fees will be lower.

Disadvantages

Harder to get into

We’ve already mentioned the application process and interview necessary to buy into a co-op. This can not only put people off but also drastically limit the types of buyers able to get into a co-op. The financial requirements are strict, and everything from debt to employment history to your savings is looked at in detail.

There’s an estimated rejection rate of about 3% to 5% in co-ops, according to The New York Times. That might not seem like a lot, but, remember, that’s already after the seller accepted your offer.

More restrictions

Just like an HOA comes with rules and regulations, a co-op comes with them too — and then some. Many housing cooperatives have strict rules and bylaws to ensure everyone is comfortable and the co-op operates without issues.

Verdel says the exact restrictions depend on the co-op, but it could range from the inability to rent your unit to board approval for renovations to approval for certain pets. It’s essential to carefully review the bylaws and regulations before completing your purchase to make sure it won’t affect your day-to-day living too much.

High fees

Verdel says he gets clients all the time who are excited about a low-priced co-op they’ve seen. However, he cautions them to take a hard look at the maintenance fees. This fee might include communal expenses, management costs, taxes on the building, utilities, and any other board-approved costs.

It can get expensive, too. For example, the average maintenance fee for a co-op in New York City is $1,500 a month. Multiply that by 12, and you’re looking at $18,000 a year in maintenance costs. That’s more than double the typical annual costs for conventional home maintenance.

Before you purchase

As with any purchase, it’s important to ask the right questions before investing your money in a co-op. After all, they’ll most likely interrogate you before you’re accepted, so it’s only fair to ask them for some information.

Verdel says it’s good to ask what precisely the monthly fee is (and what it includes) and what the sale history looks like in the community.

“[You’ll] want to know that upfront just to see if it’s been increasing in value over time or if they’ve been depreciating in value over time,” Verdel says.

Some other important questions to get answered:

• How is the cooperative managed?
• How active is the board of directors, and do its members have the relevant experience to manage a co-op?
• Is there an underlying mortgage? If so, what does each shareholder pay toward it?
• What are the rules and regulations?
• Are there other additional fees to be aware of?
• Are there renovation restrictions?
• Are there pet restrictions?
• What is the community/resident engagement like?

These are only a few of the questions you might ask during your co-op search, and each process is different. After getting all the relevant information, you might find more traditional housing is a better fit for you. Or you’ll learn a housing co-op is the type of living situation you never knew you needed.

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