What Is A Co-Op And How Do They Work?

Have you ever asked these questions about co-ops: What is a co-op? How is living in a co-op different from living in a condominium or an ordinary single-family apartment? And what does it mean to be part of a housing cooperative? These are all good questions about the mechanics of co-ops that we can provide answers to.

In some ways, co-op housing operates similarly to condo living. But at the same time, it’s worth noting they are not the same. Let’s take a closer look at this alternative homeownership model and explore what a co-op is.

Definition And Types

Cooperative housing, commonly known as a co-op, is a popular housing model you’ll find in major cities like New York City. Tenants or members collectively own and share responsibility for an entire building or property.

When you buy into a co-op, you’re not purchasing a piece of property or unit in a building. You’re buying shares in the nonprofit corporation that owns the building. You’ll receive stock instead of a title as you would with a traditional home purchase.

A co-op’s ownership structure makes this a unique housing option, with its focus on shared ownership and collaboration to run the property.

Different Types Of Co-Ops

There are many different types of co-ops. You may encounter consumer cooperatives, worker cooperatives, producer cooperatives and more. As a general rule, each exists to help people with shared interests work toward a common goal.

Co-ops are typically apartments in large buildings, particularly in big cities. However, several other co-op housing types exist, including the following:

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

Buying A Condo Vs. Co-Op

Despite what many believe are their similarities, condos and co-ops operate differently.

Let’s compare the major differences between buying a condo versus a co-op.

Buying A Condo

When you buy an apartment or condo, you buy the interior contents behind a numbered door – one of many individual units. What you own is the individual unit in the building. Because you hold the deed to your unit, you’ll benefit from any equity or additional value the unit accrues.

As a bonus, you may enjoy some flexibility when you want to renovate, upgrade or perform DIY updates in your condo unit. It’s also generally easier to finance the purchase of a condo than a co-op.

Buying A Co-Op

When you buy into a co-op, you purchase shares in the corporation that owns the property. In a co-op, all residents are shareholders, and the size of your apartment typically determines your stake in the building.

All co-op residents can access common areas in the building, and they all share in the expenses and maintenance of the property.

In other words, you pay for the right to live in an individual unit, but you don’t own the unit outright. And your ability to upgrade, add on to or renovate your apartment may be limited.

Buying a co-op typically involves a demanding application process, including an interview with a co-op board. The board may ask you to submit character references and require financial vetting before approving you to purchase shares.

You should also know that you usually can’t finance a co-op with a traditional mortgage. Co-ops require special financing because the buyer is purchasing stock in the company that owns the building, not an individual unit. Rocket Mortgage® only offers co-op financing in certain areas of New York state.

Most mortgage lenders must approve the building in addition to the borrower. Because co-op buildings are considered non-warrantable, the lender must review the board of directors and the building’s mortgage.

Purchasing a condo with traditional financing can offer many of the same benefits as co-op living. You can enjoy a more conventional financing process – including the ability to make your purchase offer more compelling with a Verified Approval Letter.¹

How Does Co-Op Housing Work?

A co-op is a nonprofit organization with shareholders and an elected board of directors and may have committees or hire professionals to keep the co-op running smoothly.

Here’s a breakdown of the entities you can find in a co-op:

• The board of directors: The board of directors makes decisions in the co-op’s best interest guided by its bylaws and established policies. Shareholders vote on all rules and restrictions.
• The co-op association: This entity manages and collects membership The money covers property taxes, building maintenance, amenities and any mortgages attached to the property.
• Shareholders: Shareholders buy into a co-op. They own a portion of the company that owns the building. All co-op owners are responsible for the co-op’s financial Shareholder payments usually cover common expenses, such as building maintenance and upkeep, renovations or improvements to common areas, underlying property mortgages and more.
• A management company: The co-op board may hire a management company for day-to-day issues such as building maintenance.