What You Need to Know About Co-op Housing
What is co-op housing?
A co-op, short for cooperative, is a form of property ownership composed of single units in a multi-unit development. Co-ops are similar to condominiums but the ownership structure is vastly different. In a cooperative, each resident has interest not only in their unit but in the entire building. The building is owned by a corporation, partnership or a land trust that manages the property according to its articles, by-laws, covenants, and restrictions.
When you buy a unit in a co-op, you receive stock in the corporation, which makes you shareholder. You lease the unit which gives you the right to occupy it with ownership by virtue of stock ownership — but you never actually own the property or receive a title or deed. You are simply a shareholder in a corporation that owns the property, which is collectively owned and managed by the residents.
Because the corporation has a mortgage on the entire building, when you buy into a co-op you must get approved by the building’s Board of Directors as well as a Lender for the mortgage.
Pricing
When you purchase a cooperative, you essentially share ownership with the other residents of the building. You'll buy stocks, which buys you into the building's partnership, but it’s not a traditional mortgage for your specific unit. So even if you pay off your portion of the loan, the corporation may still have an overarching loan on the property.
You take on the lease of the previous shareholder who occupied the unit before you did and purchase their shares of stocks. Real estate taxes and mortgages are liens against the entire property, so if it forecloses — the entire property could be lost. You will pay a monthly assessment based on the actual costs spread across all cooperative residents. This monthly payment typically includes prorated amounts of the underlying mortgage, property tax, amenities, maintenance and utility costs.
Power
Cooperative Associations require prospective buyers to be approved by the Board of Directors, which is made up of residents (shareholders) — in essence giving you authority to share in decision making. This board enforces the rules, regulations, and restrictions and holds a lot of power. They not only approve who can purchase into the building’s shares, they can also restrict the ability to rent out your space, whether you can have pets, if visitors can spend the night, what remodeling you are allowed to do to your unit, and more.
The board also handles all financial and managerial decisions. On the plus side, you have the ability to contribute to picking your neighbors. The downside is that this process may hold you up when it comes time for you to sell your unit. During this approval process the board can only reject an applicant if they don’t meet the financial obligations or if they refuse to follow the rules and regulations. Applicant requirements vary from co-op to co-op, for example some require background checks or a specific debt-to-income ratio. Your rights as a tenant may be very limited since the corporation holds the majority of the power, and the board dictates most of the policies that must be followed.
Other Decision Factors
Think about your housing needs. Co-ops are good for someone who travels a lot or someone who doesn’t want the responsibility of the exterior maintenance. Co-ops are not good for short-term living or someone who may need to sell quickly. It’s definitely more for long-term home ownership as an investment in the building and the community.
Because of the community atmosphere you will most likely buy into an environment where your neighbors will look out for you and help you during times of need. And because of this, they are kind of picky and may have a strenuous approval process.
Before you even begin the approval process with the Board of Directors, make sure you research the corporation. Get a feel for whether it will be a safe investment by getting at least 2 years of financial statements. Make sure they have a reserve set aside for unexpected repairs and expenses and really dig into their financial situation. (After all, you are buying into their stocks.) Review their policies and make sure you can live with them. Meet the other shareholders who will be your neighbors. And learn as much as you can so that you can make sure it is the right long-term investment for you.
Prior to meeting with the board, make sure that you have all of your financial ducks in a row. They will want the same information as your Lender and more! Be prepared as they tend to be pretty invasive. After all, you'll be their neighbor, contributing to the community and you making decisions with them. They may even ask you to come in for an in-person interview where they will get to know you more in-depth.
Be informed. Let a Nestiny Agent assist you in learning about how a co-op truly works, how it’s managed, policies, amenities and more. Your Agent will make sure you hire a team of experts who can help you every step of the way, from researching to the approval process to closing and beyond.
Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.
