What is co-op housing?

When you think of buying a home, you might think of a house in the suburbs to call your very own – grassy front yard, picket fence, quaintly shingled roof with a cozy little chimney poking out. While that’s certainly a lovely option, it’s not the only one, as there are many different types of homes you can own. One option for homeownership, particularly if you live in a big city, is co-op housing.

Co-op housing, explained

Co-op housing, short for cooperative housing, is different from some of the more traditional homeownership options. Co-op housing is when tenants or co-op members join to own an entire building or property, sharing responsibility for upkeep. (See how everyone is cooperating?)

Though co-ops often appear in multi-unit buildings, the co-op model differs from buying a condo or house because you’re not purchasing a specific unit – you're buying shares in a non-profit corporation that owns the building. And rather than hold a title, as you would in other homebuying situations, you hold stock instead. This shared ownership and responsibility make owning a co-op a unique option. While co-ops are not restricted to certain areas, they are much more common in large cities such as New York City or Chicago.

Types of co-ops

While multi-unit apartment buildings are very common for co-op housing, co-op arrangements can be applied to townhouses, manufactured homes, single-family homes, duplexes and more. There are also a variety of ways co-ops can be structured. Common co-op structures may include:

• Market rate co-ops: This allows members to buy and sell shares at whatever rate the market will allow.
• Limited equity co-ops: This establishes restrictions on the price at which shares can be bought or sold.
• Leasing co-ops: In this scenario the co-op doesn’t own the building but rents it from an outside investor. In this scenario, the co-op doesn’t accumulate equity in the property.

Co-op maintenance fees

With multiple owners holding shares in a single building, how does a co-op work when it comes to maintenance fees? The fee structure for co-ops is different than many other types of home ownership.

Typically, the monthly maintenance fee includes everything, such as operating expenses, property taxes, building insurance and mortgage costs. Many maintenance fees can also cover the cost of utilities such as heat and water, but not always. The costs are split among co-op members based upon how many shares they own.

Co-op fees are set by the co-op's board and shareholders must vote on them at a shareholder meeting. The fees are generally set by a majority rules system. While small fee increases are expected, sometimes some shareholders want to make expensive renovations, such as adding a fitness center, while others don’t think the additional improvement costs are worth it. So, if the majority wants that new fitness center, and you’re in the minority that doesn’t, you’re still obligated to pay your share of the costs.

If the cooperative unit maintenance fees include a unit utility charge, the maintenance fees may be reduced by the documented amount of unit utility charges that are included prior to calculating the housing expense-to-income ratio and debt-to-income ratio.

Co-op board approval process

Another way buying into a co-op differs from other types of homeownership is the approval process. Rather than getting approved for a traditional mortgage, you’ll need to get special financing, typically a share loan. This is because you’re not actually purchasing property, you’re purchasing stock in the company that owns the property.

In order to receive financing approval, a cooperative share mortgage must be a fixed rate, fully amortized first mortgage. A cooperative share mortgage refers to a mortgage that is specific to cooperative housing, where residents own shares in the cooperative corporation rather than owning real property outright. The fixed rate, fully amortized first mortgage specifies the type of mortgage required. It must have a fixed interest rate (not adjustable), and it should be fully amortized. This means the principal and interest are paid off completely by the end of the loan term.

An ARM (Adjustable Rate Mortgage) or HELOC (Home Equity Line of Credit) is explicitly mentioned as not permissible under the financing approval criteria you’re discussing. The original maturity cannot exceed 30 years. Please note that Chase does not offer HELOC products at this time.

You must have a right to occupy the unit for a period that extends at least to the maturity date of the share loan (although this right will be subject to the terms and conditions of a proprietary lease or occupancy agreement that you enter into with the cooperative housing corporation). Title Insurance is required when co-op shares are recognized as real property. These requirements are typical in many co-op board approval processes to ensure stable financing and predictable payments for shareholders.

Additionally, successfully securing financing is not enough to buy into a co-op. Because ownership is shared, you’ll typically have to pass an interview with the co-op board, as well. You may also be subject to financial vetting and be required to submit character references to the board.

Co-op housing boards are legally required to adhere to Fair Housing Act regulations but can decide their “ideal resident” within those bounds. What that means will vary depending on the co-op. According to the U.S. Department of Housing and Urban Development, The Fair Housing Act prevents people from refusing housing to anyone based upon their race, color, religion, sex (including gender identity and sexual orientation), disability, familial status or national originec-fair-housing-act-discrimination.

Co-op vs. condo: What’s the difference?

There are a few key differences between condos and co-ops.

Condos:

• When you buy a condo, you buy and hold the deed to a specific unit.
• If that unit builds equity or value, you may benefit financially.
• It’s generally easier to renovate your condo unit since you own it.
• Condos can usually be financed with a traditional mortgage.

Co-ops:

• You do not own a specific unit.
• You share expenses in the building with other shareholders.
• You may be limited in your ability to renovate or upgrade the unit you live in.
• Co-ops require special financing.

Co-op housing pros and cons

Like any homebuying option, cooperative housing has its pros and cons.

Advantages of buying a co-op

• Typically lower closing costs than condos
• Fewer personal maintenance responsibilities than a house, as your monthly fees cover building maintenance
• More say in how the building is run
• Potentially closer-knit community
• Possibly greater inventory

Disadvantages of buying a co-op

• Typically higher monthly fees than condos
• Potential for greater restrictions depending on how shareholders want to run the building
• Must pass an approval process with the board of directors
• May take longer to close on the home

In summary

Co-ops are an alternative type of homeownership that may be worth exploring for a variety of people, especially those living in a large city. When you buy into a co-op, you’re not buying a piece of property. You're purchasing shares of a non-profit corporation that owns the building. While this structure may limit you in some ways, such as renovation, it may also relieve the cost of property maintenance that comes with owning a house. Isn’t it great to have options when it comes to owning a home?

What is a co-op: FAQs

1. What are the tax benefits of owning a co-op?

Tax benefits of owning a co-op vary by city and state. Some possibilities include deductions for a share of the mortgage interest and real estate taxes paid by the co-op. You can talk to a professional tax preparer in your area for the most accurate information.

2. Can a co-op board evict a shareholder?

Yes. If a shareholder isn’t abiding by the building’s rules, is breaking the law or is otherwise disruptive, they can be evicted. Typically, shareholders will take a vote when deciding to evict someone.

3. Can you rent out a co-op?

Whether you can rent out a co-op unit depends on your co-op's individual rules. Some boards may allow renting unilaterally, some may allow it under certain circumstances, such as a time limitation, and some may prohibit it entirely.