When you’re on the market for a new home you’ll have lots of housing types to choose from. One of these is the cooperative, or co-op for short. Co-ops differ from traditional housing in a lot of important ways. They won’t appeal to everyone, but some are sure to see the benefits in them. For people living in New York City or some parts of the Midwest, they’re a way of life. So what exactly are they and how do they differ from other housing types?
What is a Co-op?
A housing cooperative, or co-op, is the legal term for a housing unit that is jointly owned and controlled by its residents. When you purchase a unit in a co-op building, you’re not actually buying the property. Instead, you’re purchasing shares, the size of which depends on the size of your unit. You’ll also hold a proprietary lease on your apartment which gives you the exclusive right to use it. Compared to a condominium, your use of the apartment is the same. What is different is the type of ownership you have.
In a way, co-ops work a bit like non-profit cooperations. They have a board of directors and each resident is a shareholder with a stake in the building. In addition to owning your individual unit, you’ll also own a share of the common areas and shared amenities. Much like a condo, the upkeep of these amenities and common areas are covered through the payment of monthly maintenance fees. All shareholders are required to pay these without exception.
Board of Directors
Another difference between co-ops and condos is how the board of directors exercise their power. The board holds far more power in a co-op community than in a condo community. The rules on what you can and can’t do are much stricter and the board has the right to reject a buyer if they feel they wouldn’t be a suitable fit for the co-op. To be approved for purchase, buyers have to prepare something called a Co-op Board Package. This will outline their finances and include references from personal friends and work colleagues attesting to their character and reliability. Buyers will then have to get through a board interview in which they’ll be questioned further on their finances and personality to determine if they’re a good fit for the co-op. What should be clear by now is that stability is what co-op boards look for.
Co-ops can also be broken down into three distinct types:
- Market-Rate – The most common type of co-op. Residents are allowed to sell their shares whenever they want for as much money as they want. This co-op type is very common in New York City.
- Limited-Equity – A co-op type that’s geared more towards providing affordable housing. To keep it affordable, residents have a cap on how much equity they can earn on their units. This prevents them from selling them for huge profits
- Group-Equity – Also known as Zero-Equity Co-ops, residents of this type cannot build any equity at all. However, residents will also pay rental rates far below the market rate.
Buying a Co-op
Purchasing a unit in a co-op building comes with a few extra steps to the buying process than traditional housing. You’ll also have more considerations to make as you’ll be bound by the co-op’s rules and regulations. Before making any offer make sure you carefully read what those rules are. You’ll also want to check what the maintenance fee is that you’ll be paying each month. Depending on the co-op, this can be either a negligible or substantial amount. Remember also that a portion of this fee will be tax-deductible.
If you need financing for the purchase, then the loan you receive won’t actually be a mortgage. Instead, it’ll be a loan to purchase shares. In effect, this won’t be any different from a mortgage, but it will usually require a down payment of 10-20%. Speaking of finances, you’ll want to start getting them in order as soon as possible for your board package. The more financially stable you can make yourself look the better your chances are of being accepted. Your Exclusive Buyer Agent can be of great help here, not only in helping you put your board package together but also finding out what this particular board is looking for in an applicant.
Pros of Co-op Living
- Usually cheaper to purchase than a condo
- You can typically get higher square footage for your money
- Maintenance of the building and common areas are not your responsibility
- Greater stability
Cons of Co-op Living
- Most will require a down payment of 10-20%
- Board rules can be rather restrictive
- Subletting is usually forbidden
The Bottom Line
Every co-op will be a little different in their rules and how they are run. Before making any offer, make sure to carefully read the co-op’s articles of incorporation, bylaws, rules, and any other available documentation. Ask any questions you can where the answers aren’t clear. For instance, their policies on pets, subletting and your ability to make changes to your unit. If co-op living sounds right for you then make sure you hire an Exclusive Buyer Agent that has experience dealing with co-op purchases. They’ll know all the steps and might even have experience working with the board of your chosen co-op.