What Is A Co-Op? Meaning, Pros And Cons And FAQs

When you’re looking for a place to live, you’ve probably considered the usual options – apartment or house, rent or buy. Housing affordability can be a major concern for many people, but one solution that has gained popularity in recent years is co-op housing. So, what is a co-op? Let’s take a look at the basics of co-op housing.

What Is A Co-Op?

A co-op, or housing cooperative, is a form of real estate homeownership that allows residents of a building or group of buildings to hold ownership of the property as shareholders. Each resident holds a share in the cooperative corporation and has a say in how the co-op is run. When you live in a co-op, rather than owning your individual unit like you would if you bought a house or condo, you own co-op shares of the entire property instead, similar to cohousing.

How Does A Co-Op Work?

A housing co-op operates as a nonprofit organization or corporation made up of all its shareholders and is run by a board of directors. In a co-op, each member purchases a share in the cooperative and, in return, is able to live there. The number of shares in the organization that you own is based on the market value of the unit you are “purchasing” to live in. A co-op housing development might be an apartment building or even a row of townhouses – not all housing cooperatives look or operate exactly the same.

The shareholders that make up the co-op are all the other tenants of the building or development. Together, they share ownership of the entire development, including the interior, exterior and common areas of the property. Co-op shareholders own everything on the property together – which means if you want to make changes or renovations to your unit, you may have to get approval from the board of directors.

The board of directors is the governing authority within a housing co-op. Co-op members elect a board of directors to oversee the management and maintenance of the property. Members also participate in regular meetings and decision-making processes related to the co-op's policies and finances, similar to the way a homeowners association (HOA) is operated.

Instead of paying rent to a landlord, residents pay a monthly fee that covers the cost of running the co-op, including mortgage payments, maintenance and utilities. An individual shareholder’s fee amount may vary based on the value of their share of the property.

Condo Vs. Co-Op Definition

The biggest difference between a condo and a co-op is ownership. With a condo, you have full ownership and control of your unit, including renovations and the ability to sell, while a co-op only grants you a proprietary lease that allows you to live there in accordance with your shares in the building.

When you buy into a co-op you are not buying the property itself, just the right to live there. You won’t ever sell the property itself, just your shares in the company. This also limits your ability to renovate or sublet. In general, major repairs, insurance, replacement of worn-out equipment and upkeep of common areas are the responsibility of the co-op organization, rather than the tenant. In a condo, the majority of issues inside the unit are the responsibility of the owner.

Pros And Cons Of Buying And Living In Co-Op Housing

Just like any living situation, there are pros and cons to buying and living in co-op housing. Below are a few elements to think about.

Pros

• Co-ops are typically less expensive than single-family homes or condos.
• You may have fewer maintenance responsibilities as a co-op owner.
• Some co-op ownership fees are tax deductible.
• Co-ops can create a stronger sense of community since you share the space and residents have a say in how some things are run.

Cons

• In some areas, the monthly fees associated with co-op ownership can be more expensive than renting.
• Living in a co-op means following the bylaws set and enforced by your board of directors. 
• You must undergo and pass the approval process with the board of directors. 

How To Buy A Co-Op House

Since buying co-op housing is a little different than renting or buying a home, we’ve created a list of steps you’ll need to follow to buy shares in a co-op.

1. Get approved for a loan: Since you won’t fully own the property, lenders likely won’t want to give you a mortgage for the shares because it wouldn’t be possible to foreclose on the property, should you default. You’ll need something called a co-op or share loan. These loans don’t operate the same way mortgages do, which means you may not have to follow the same steps, like closing, making a down payment, etc. To learn more about co-op loans, contact one of our Home Loan Experts.

2. Connect with a real estate agent: If you’ve never used a real estate agent before, the process of finding the right one for you can be overwhelming. There are many ways to shop for real estate agents, such as checking local listings, attending open houses, signing up for agent referral programs, researching real estate directories online and using your personal network.

3. Find a co-op: Co-ops can take many different forms – you may see some as apartment buildings, townhouses and groups of single-family homes. When looking for a co-op near you, you can search your local housing authority’s website to find Department of Housing and Urban Development (HUD) approved cooperatives in your state.

4. Wait for lender approval: During the application process, you’ll provide information to your lender about how the co-op operates. The lender will also look into the board of directors and take a look at the underlying mortgage.

5. Apply for approval with the board of directors: The board of directors typically screens and interviews potential tenants before they can buy shares of the co-op and sets monthly fees for all residents.

Co-Op Housing: FAQs

Here are a few other items to know and consider when thinking about buying a co-op.

What are the different types of co-op housing?

• Limited equity co-ops. A limited equity co-op is a housing cooperative that sets restrictions on the price at which a shareholder may sell their portion of the corporation for. This limited accumulation of equity ensures that when a co-op owner sells their shares, their unit of property can be sold affordably to a new tenant.
• Market rate co-ops. Residents may gain or lose equity in their share of the property and can sell their shares for their exact market value, which allows them the opportunity to potentially sell for a profit.
• Group or zero equity co-ops. Group equity or “zero equity” co-ops allow buyers to pay a share or deposit to join the co-op, usually at an amount comparable to a deposit on a regular rental property. Similar to a limited equity co-op, this is done to keep the price of investing in the development as an owner affordable.
• Leasing co-ops. In a leasing co-op, the co-op corporation doesn’t even own the building or development; instead, they lease it from an outside investor. No equity is built on the property, but shareholders may have a chance to eventually buy the building and convert it to another co-op type in the future.

Can you buy a co-op house with a mortgage?

Not usually. Since you won’t fully own the property, loans for co-ops work a little differently. Rather than getting a loan to pay for the property, you can get a loan to pay for your shares of the co-op with a co-op or share loan.

Is a co-op a good investment?

Co-ops don’t provide the same upside or potential to earn passive income, like when you buy a house. And since you can’t rent the space out, you won’t be able to earn money that way. But they will likely retain and grow their value over time.

How much does a co-op cost?

It depends on the location and size of the co-op, among other things. Co-ops generally offer a more affordable way to buy into housing in big cities. Monthly expenses and charges can be higher than other options, based on what expenses these fees cover (such as utilities, parking, etc.).

How can I find co-op housing?

You can search your local housing authority’s website to find Department of Housing and Urban Development (HUD) approved cooperatives in your state.

The Bottom Line

As you can see, co-op housing has its advantages and disadvantages, just like any other living situation. If you live in a big city and are looking for a more affordable option, or you’d prefer building a community with other shareholders, a co-op might be a great decision.

Now that you know a bit more about co-op housing, you’re on the right track to deciding if buying into a co-op is right for you. If you’re searching for housing – whether it’s a co-op, condo or house, reach out and connect with an agent.