What is a co-op and how does it work?

Many people are curious about co-ops but unsure how they work. Understanding what a housing cooperative is and how it differs from apartment living or condo ownership can help you determine if this homeownership model is right for you.

Co-op housing shares some similarities with condo living, but the two models operate differently. It’s important to understand these distinctions before making a housing choice. In this guide we’ll explore what makes this housing alternative unique and how the ownership structure works.

Definition and types

A co-op is a nonprofit entity where you own shares that correlate to a living space versus owning the property itself. When it comes to shared ownership, as a co-op resident you would own shares of the property, but you don't own the deed.

With housing costs on the rise, co-ops can provide a more affordable option. And the shared responsibilities and sense of community might be appealing to some.

Though there might be a lure of living in a co-op, it might not be a good fit financially. You might find yourself facing difficulties in securing proper financing to buy one. Down payments of 10% or more are not uncommon, and the lender may have to approve the finances of the co-op as well as your personal finances before agreeing to lend.

Different types of co-ops

Co-ops aren’t just a type of housing. There are many different types of co-ops, such as consumer cooperatives, worker cooperatives, and producer cooperatives, among others. Generally, each type of cooperative is set up to help a community work toward a common goal.

Co-op housing can frequently be found in heavily populated urban areas like New York and Chicago. Many different types of co-ops exist including:

• Townhouses
• Duplexes
• Single-family homes
• Manufactured homes
• Apartments
• Clusters of tiny houses on co-op land

Buying a condo vs. co-op

Getting a loan for a condo and purchasing a co-op are different processes. They also require different forms of financing. Let’s compare the major differences between buying a condo versus a co-op.

Buying a condo

When you buy a condo, you own the individual unit in the building. And as you hold the deed to your condo, you can gain any equity or additional value if the unit appreciates over time. You may also have agency to renovate, upgrade, or perform DIY updates in your condo as long as they abide by the homeowners association (HOA) rules.

It’s easier to finance the purchase of a condo than a co-op. For example, you can finance a condo with a conventional, VA, FHA, or USDA loan.

When a condo is warrantable, you'll likely find greater mortgage options. A warrantable condo is one that checks off criteria set by Freddie Mac and Fannie Mae.

Having a Verified Approval Letter¹ may also allow for a smoother financing process since an underwriter will review your overall financial picture before you make an offer on a property.

Buying a co-op

When you purchase a co-op, rather than buying the individual unit, you buy shares in the corporation that owns the property. All residents are considered shareholders. Your stake in the building hinges on the size of your unit.

As a co-op resident, you also have access to common areas in the building. You share in the expenses and maintenance of the property.

There are hurdles to jump over in financing a co-op. For one, you usually won't be able to finance a co-op with a traditional mortgage. You'll need to look for special financing options. That's because you own shares versus units of a building.

You might be able to take out a co-op loan. While they can have similar income and credit requirements as a mortgage, lenders might have greater scrutiny of the particulars of the co-op.

For example, the lender will need to be informed about the property's total mortgage. That way, they can evaluate its worth in lending to the borrower for a share of the property's stock. Co-ops also usually require a higher down payment in the range of 10% or 20%.

How does co-op housing work?

Technically, a co-op is a legal corporation and is made up of different groups.

• Members: Members of the co-op not only live in the cooperative, but they also run it. This can include dividing shared responsibilities, such as maintenance of the property and landscaping.
• Board of directors: Members elect the board of directors, and they also make sure the co-op runs smoothly.
• Co-op association: Members pay a monthly amount to the cooperative association, or cooperative corporation. These dues cover operating expenses.
• Shareholders: Because the members own the co-op, they also are the shareholders and have a stake in it. As shareholders, they have a right to occupy a dwelling in the unit. They also have ownership of the co-op and usually receive a certificate of membership.
• A management company: The board of the co-op might hire a management company for day-to-day issues like building maintenance.

Advantages and disadvantages of co-op living

Co-ops can have a lot of appeal for some. They're considered a niche housing option; you'll want to fully understand the pros and cons to see if it will work for you.

Pros of co-ops

• Cheaper costs. One of the major advantages of a co-op is that they usually come with a lower price tag compared to housing in high-cost locations.
• Reduced responsibility for property maintenance. Because your monthly fees usually cover building maintenance, you might not be burdened by as much ongoing upkeep. Further, maintenance might be shared among the members.
• More agency in how your building is run. Because you can vote on different bylaws and are a shareholder, you can vocalize how you'd like your building to be operated.
• Greater community. Living in a co-op can foster a greater sense of community.
• Potential tax benefits. Owning a co-op means you can also potentially enjoy the same tax benefits as traditional homeowners, such as deducting the mortgage interest and real estate taxes on your returns.

Cons of co-ops

• Monthly fees. To help with the general upkeep of the co-op, you'll need to pay a monthly fee. The costs can vary, and they'll be disclosed before you purchase one.
• Higher down payment. Because you're buying shares of a property, rather than real property, this poses a higher risk to lenders. In turn, co-ops usually require higher down payments around 10% or 20% and upwards.
• Rules and restrictions. Co-ops also come with their own set of rules. This depends on the specific co-op but can include restrictions on remodeling and renovations, renting out the unit, and noise restrictions.

FAQ

What’s the difference between a condo and a co-op?

When you buy a condo, you're purchasing the unit itself, and you also can enjoy any equity that it accrues. You'll also likely have an easier go of securing financing. A traditional condo can be eligible for an FHA, VA, or USDA loan. You also can make modifications to your condo if they follow the HOA rules.

With a co-op, you don't own the unit itself. Instead, you own shares of the property. Getting a loan might be difficult, and you might need to look for special financing or take out a co-op loan. Co-ops usually require higher down payments, and you usually won't be able to make changes to your dwelling.

Should I buy a co-op?

Co-op housing might make sense if the following is true for you:

• If you're able to make a large down payment or pay in all-cash
• If you can secure financing, which might be a lengthy process
• If you're looking for lower housing prices in an expensive city
• If you're not planning to move again or willing to have a time-consuming reselling process
• If you don't want to make extensive changes or renovations to your home

Can I finance a co-op purchase with a mortgage?

While it is possible to purchase a co-op with a mortgage, the lender will need to do a thorough examination of the cooperative’s finances alongside your creditworthiness. Plus, you'll also need to bear in mind they typically have higher down payment amounts and greater restrictions than traditional homes and condos.

It might also take longer to close on the home. In some cases, it can be anywhere from two to six months, and it depends on the building, board of directors, lender and the buyer.  

The bottom line: Co-ops are not for everyone

While they are growing in popularity, co-ops remain a unique housing situation. They can make sense in certain scenarios, but they also can come with greater restrictions and fees.  Instead of owning the individual unit, you own shares in the co-op. This means that financing challenges can pop up. You’ll need consider your goals, lifestyle and finances before deciding to pursue a co-op.

If you're in the market for a home, you can reach out to Rocket Mortgage² to get approved for a loan.

¹ Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including, but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.

² Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.