What is a co-op and how do you buy one?
Quick insights
- A co-op, or housing cooperative, is a type of housing in which you purchase shares in a corporation that owns the building rather than owning your individual unit directly.
- Buying a co-op typically involves applying for financing, meeting the co-op board’s requirements and receiving board approval.
- Before buying a co-op, review the building’s rules, monthly fees and financial requirements to determine whether it’s the right fit for your lifestyle and budget.
In the world of homeownership, co-ops operate differently. You’re not buying property; you’re buying shares that grant you residency and a voice in how the building is run. Because co-ops prioritize financial stability, first-time homebuyers typically have to go through a detailed review and board interview before closing. For many, the process could be worth it since co-ops may offer lower prices and long-term building consistency.
What does co-op mean?
Co-op is short for co-operative housing. The key difference between a co-op and other forms of housing is that rather than buying a property and holding a deed or title, you buy shares in a co-operative corporation, which gives you the right to occupy one or more units.
As a co-owner of the co-operative, you would also need to make monthly payments to cover maintenance and property management costs of the building. You can then choose to sell those shares to another buyer if you decide to leave.
What does co-op living look like?
Living in a co-op means you’re a co-owner of the co-operative with rights of access to the property, its common areas and amenities, as spelled out in your co-op agreement. You may also need to follow specific rules relating to quiet hours, how many guests you can have and how long they can stay.
You also need to agree to abide by the co-op’s rules relating to how you manage your unit. This may affect whether subletting your unit to others is possible and whether you can make cosmetic changes to your living space.
Becoming a member of a co-op may also require a more involved vetting process than other types of homes because you’ll need to have your finances reviewed by the co-op board, as well as your lender.
Who actually owns a co-op?
In some ways, buying into a co-op is like becoming a shareholder in a corporation that owns the building. The co-op may have a board of directors, who make decisions based on the co-op’s bylaws and established policies. As a shareholder, you have the right to vote on these decisions.
The day-to-day management of the building may be run by a co-op association that collects fees, pays any mortgages, covers property taxes and handles maintenance. Some or all of these responsibilities may also be managed by an outside property management company, hired by the co-op board.
The ownership structure of a co-op can vary. Some are market-rate co-ops that allow members to purchase and sell shares for whatever the market will allow. Others set limits on the price and conditions in which a member can sell. Some are leasing co-ops, which means owners don’t build equity, but the building can maintain cash reserves to compensate owners if the building is sold.
How is a co-op different from a condo?
There are some key differences between a co-op and a condominium. Like co-ops, buying a condo means you’re buying into a shared property with other homebuyers. However, with a condo, you’re the owner of the property with a deed of ownership.
While a condo may have some shared space restrictions like a co-op, as a condo owner, you have the right to decorate or renovate the space within the walls of your unit. You also have the option to sell the property or borrow against the available equity.
What is a condop?
There are some buildings called condops, which include both co-op and condo interests. Because condop structures can vary by building, prospective buyers may want to review the offering plan and other building documents to understand how ownership is structured.
How do you get a co-op loan?
Because buying into a co-op doesn’t come with the same rights of ownership as buying a house, you may not be able to buy into a co-op with a regular mortgage loan. Instead, you may need to take out a co-op loan. While co-op loans can have similar income and credit requirements compared to a mortgage, this type of financing may also require greater scrutiny of the co-op organization itself.
The co-op project must be approved by the lender, and qualification requirements must be met—for example, standards related to the building condition and occupancy rates. This can be more involved than a home appraisal because your lender would be using your shares in the co-op as collateral on the loan rather than the property itself.
What are the benefits of owning a co-op?
There are some key areas where buying into a co-op can be preferable to renting or owning a home:
- Stronger tenant protections: Unlike apartment buildings, where you sign an agreement with a landlord, the shared ownership model of a co-op gives you greater protections against eviction and rent increases. It also allows you to have a greater say in how the building is managed.
- Lower buy-in costs: With co-ops, your cost to buy may be lower since you’re purchasing shares in a corporation rather than a property of your own.
- Lower maintenance costs: Because a co-op is owned collectively, many home repair or maintenance expenses that would be your responsibility as an owner would be handled by the co-op and the cost divided among your fellow co-op owners.
- Lower property taxes: Since property taxes are shared by the owners in a co-op, you may pay less in property taxes than you would for a similarly priced condo. You may also be able to deduct your share of property taxes from your federal income taxes, subject to applicable tax rules and limitations. For more information about the implications for your tax situation, consider consulting a tax professional.
What are the disadvantages of owning a co-op?
The unique ownership structure of a co-op has certain challenges and disadvantages to consider before committing:
- Higher monthly fees: Co-op living may offer lower costs of entry and more amenities than condos, but the fees may be higher because they’re required to cover greater operating costs.
- Stricter lending requirements: While some lenders offer co-op loans, they may require borrowers to make a larger down payment and have a higher credit score. Your lender may also require a review of the association’s finances.
- Rigorous approval process: When you buy a co-op, your application will be reviewed by the co-op board, and you may need to submit additional documentation or do an in-person interview before they’ll approve your application. If you choose to sell, you’ll also need board approval for any potential buyers before you can sell your share.
- Can’t be used as investment properties: Both lenders and co-op boards prefer owners to use their assigned unit as a primary residence. This means you may not be able to use a co-op unit as a rental property.
In summary
Buying into a co-op can be an option for those looking to own a home without all of the traditional responsibilities. However, buyers should also be aware of the challenges of purchasing a share in a community.
If you’re looking for a loan, talk to one of our home lending advisors. They can help you find financing for your needs.
