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What Is A Co-Op And Should You Buy One?

Jamie Johnson5-minute read

February 03, 2021

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Unless you live in a big city, like New York or Washington D.C, you may not be familiar with co-ops. A co-op is one of several types of homes in the U.S.

It’s similar to a condo, but instead of being independently owned, all the tenants have a stake in the building together. While Rocket Mortgage® does not offer co-op financing right now, this article will explain more about what a co-op is and whether or not this investment is right for you.

What Is A Co-Op?

A co-op is a building that is jointly owned by all of its inhabitants. When you buy a co-op, you’re not purchasing a home. Instead, you’re buying shares in a nonprofit corporation that allows you to live in a home.

Everyone who lives in the co-op is considered a shareholder, and the size of your apartment determines your stake in the building. You’ll all have access to certain common areas and will be responsible for maintaining the property.

The co-op will also have a board of directors that creates by-laws that outline the building's rules. However, every shareholder gets a say in how the building is run.

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What’s The Difference Between A Condo And A Co-op?

Many people confuse condos and co-ops, but there are differences between the two. When you purchase a condominium, you’re buying ownership of that property. Since you have the deed, you can take advantage of any equity that accumulates in that property.

You also may have more leeway when it comes to decorating and renovating a condo. And it’s typically easier to purchase and acquire the financing for a condo.

In comparison, when you buy a co-op, you’re buying shares in that property. So, while you will have a place to live, you won’t own your home. This means you may have fewer options when it comes to what you can do with the property.

And buying a co-op tends to come with a more stringent application process. You’ll likely have to interview with the co-op board before you’re approved to purchase shares. And the board may request additional financial documentation.

What Does ‘Co-op’ Mean?

According to the International Co-operative Alliance, the co-op definition is “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.” These values play out in a couple of different ways.

Mutual Responsibilities And Restrictions

Since a co-op is a financial nonprofit organization, it has a board of directors and shareholders. The shareholders own a portion of the company that owns the building.

The co-op board is responsible for setting policies and making decisions in the co-op's best interest. These policies are commonly referred to as by-laws and can sometimes impose burdens on the shareholders.

For instance, all co-op members may be expected to pay fees or be prohibited from subletting their apartment. And the by-laws may also require co-op board approval for new shareholders of the co-op. This could end up restricting who co-op residents can sell their shares to.

Mutual Financial Obligations

All co-op owners are responsible for the co-op’s mutual financial obligations. These responsibilities can include things like maintenance, common area renovations, or the building’s underlying mortgage.

What Does Co-Op Housing Look Like?

A typical co-op is an apartment in a large building in a big city, but several other co-op models exist. A co-op can also be a townhouse, a duplex, or any other type of available housing. A co-op can even be a single-family home, a group of mobile homes, or tiny houses located on co-op land.

Special Purpose Co-ops

Occasionally, there are co-ops established to meet a specific housing need or create a living space for like-minded individuals. Some examples of this would be low-income housing or senior housing.

Should I Buy A Co-Op?

Like with any financial investment, there are pros and cons to buying a co-op. Let’s look at a few things you should consider first.

Advantages Of Buying A Co-op

Many people who live in big cities choose to invest in co-ops simply because they are the only affordable entry-level housing available. Here are some other advantages of buying a co-op.

You’ll Pay A Lower Purchase Price

If you live in a large city like New York, co-ops tend to be much cheaper and require a smaller down payment than buying a condo.

You’ll Have Negligible Responsibility

When you own a property, you’re responsible for any unexpected maintenance that comes up. Owning a co-op apartment is similar to renting in that you aren’t responsible for the upkeep beyond your own unit.

You’ll Know Your Neighbors

Even if you don’t socialize with your neighbors, you’ll still learn a certain amount of information about them. That’s mostly because of the co-op board disclosures that all prospective residents must make.

The co-op boards often require very detailed and extensive financial records and character references. However, prospective buyers cannot be excluded on the basis of race, religion, or any other protected category.

Disadvantages Of Buying A Co-op

While purchasing a co-op could be the right decision for some people, there are a few things you’ll want to consider first. Here are some of the downsides that come with buying a co-op.

You’ll Pay Higher Monthly Fees

Even though the purchase price of a co-op is lower than a condo, the monthly charges tend to be higher. How much higher typically depends on what those charges cover. For instance, you may be expected to pay fees for things like utilities and parking.

You’ll Face Restrictions

Before buying a co-op, it’s essential to read through all the by-laws carefully. The by-laws will outline what is and isn’t permissible for building residents. Some co-op boards are notorious for their extreme limitations, but the co-ops within those buildings tend to appreciate in value.

For instance, you may see it as a disadvantage that you cannot paint or renovate your unit. But this could make it easier for you to sell down the road. But the restrictions outlined in the by-laws must be factored into both the price of the co-op and your purchase decision.

You’ll Have A More Limited Pool Of Future Buyers

Co-op by-laws can place onerous restrictions on the shares’ resale, making co-ops potentially far less liquid than other types of real estate. But it is important to note that during COVID, co-ops held value better than condos in NYC because co-op boards weed out financially risky prospects.

Can I Finance My Co-Op Purchase With A Mortgage?

Because co-op owners do not own real estate, the financing process is slightly different from a standard mortgage application. Instead, you’ll need to take out something called a share loan.

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.

Some co-ops already have existing relationships with certain lenders, which can make the financing process much easier.

Summary

When you purchase a co-op, you’re not buying a home but investing in the co-op stock instead. The application process is usually pretty stringent, and the co-op board may limit what you’re able to do with your unit. But if you live in a big city, this can be an affordable way to find housing.

Make sure you do your research and consider all your options before buying into a co-op. You can check out Rocket Mortgage® to learn about the different types of homes available.

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Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.