Investing in a housing cooperative can be a rewarding alternative to the traditional homebuying process. But buying a co-op comes with particular considerations and consequences.What is a co-op and is it right for you? Let’s find out.
What is a co-op?
Co-op is short for housing cooperative. It’s an alternative to home or condo ownership. It’s run like a corporation and owned and controlled by residents. The co-op owns the building, and residents own shares of the co-op.
How do housing cooperatives work?
Housing cooperatives engage in the cooperative ownership of one or more residential buildings. Co-ops also own the land under the building(s). Residents purchase shares of the co-op instead of deeds to a specific unit, and residents run and operate the co-op in a democratic process that involves the election of a board of directors.
Buying shares vs. buying real property
When you buy real property, you typically get a mortgage loan. The property acts as collateral for the loan, which reduces risk to the lender. If the payee defaults on the loan, the lender can repossess the property through the foreclosure process.
When the buyer purchases shares in a co-op, the lender does not have the property as collateral. Instead, the lender assesses the viability of the co-op. If the co-op meets the lender’s standards, a share loan will be issued.
The co-op board and board rules
Co-ops are organized much like non-profit corporations. There’s typically a board of directors that deal with the day-to-day operations of the organization. Board officers are residents elected or appointed by the group. How a co-op’s board is created depends on the rules and bylaws of the organization.
Those rules and bylaws also determine what you can do with your unit.
Living in a co-op means taking part in a democratically controlled housing community. That means you may have voting rights and duties. But you may also be required to participate in the maintenance and care of the property.
In addition to your loan payments, you’ll most likely pay a monthly maintenance fee for the management of the property. These maintenance fees cover day-to-day needs like lawn care, pest control, and shared utilities. If residents are performing maintenance, these fees are usually inexpensive.
Types of housing cooperatives
There are three types of cooperative housing structures:
1) The market-rate co-op: With a market rate, co-op residents buy and sell their shares based on what the market dictates. This type of co-op is common, especially in large metros like New York City. Residents living in a market-rate co-op have the opportunity to make a profit when they sell their share(s).
2) The limited-equity co-op: The limited-equity co-op restricts the price point at which a resident can sell their shares. This is commonly used for affordable housing cooperatives. Buying into a limited-equity co-op lowers the financial bar for homeownership.
3) The Group equity or leasing co-op: In this kind of co-op, residents don’t benefit from equity ownership. Instead, they get occupancy rights and pay rental costs below market value.
Co-op housing pros and cons
Like all real estate transactions, there are benefits and drawbacks to purchasing. The main benefits of owning a co-op include:
- Affordability: Co-ops are typically less expensive than condos and single-family homes. They also typically have lower closing costs.
- Low-maintenance: Repairs and maintenance work typical of homeownership are usually done by a paid crew hired by the co-op.
- At-cost monthly fees: Shared expenses, like maintenance fees, are assessed at cost and shared by all residents.
- Tax savings: Though residents don’t own real property, they are still entitled to all the tax deductions available to homeowners. They also don’t have to pay a transfer tax for transferring a deed.
- Community living: Co-ops tend to come with a culture of shared responsibility. Often co-op residents report feeling in close community with other members.
- Less turnover: Because the process for buying a co-op is extensive and most co-ops limit subletting, residents typically have the same neighbors for years.
- Strict community rules: While restrictions can be seen as a drawback, they can also ensure that your living environment is quiet, clean, and respectful. Just be sure the rules fit your lifestyle.
The main drawbacks of co-op ownership include:
- High bar for entry: Buying a co-op can be difficult as prospective buyers need board approval. This often means interviews with the board and the presentation of financial documents.
- Stricter financing rules: Prospective buyers often need to put more money down than they would with a conventional loan on a condo or other home purchase. This can also make selling your co-op share(s) more difficult.
- Living restrictions: Residents need to present renovation plans to the board for approval. They also need board approval to rent their unit.
- Shared financial responsibilities: In many co-op structures, when one resident defaults on their maintenance or loan payment, the other residents must make up the difference.
- Maintenance duties: With smaller co-ops, the maintenance work, such as lawn care or snow removal, may be done by residents. Though this creates a sense of shared responsibility and lowers monthly maintenance fees, it may not be feasible for everyone.
Additional considerations before purchasing a co-op
Buying a co-op is very different from the average homebuying experience. The application process involves an interview with the co-op board with an examination of your financial standing.
You should be ready for this additional scrutiny and prepared to put more money down when purchasing a co-op. While these stringent procedures may seem like a lot, they protect shareholders. The financial security of the co-op depends on the financial security of each resident.
Read full article:Redfin.com