A young woman standing on a balcony in the city

A co-op (a.k.a. a housing cooperative) is a type of housing owned by a corporation made up of the owners within the co-op. The corporation owns the interior, exterior and all common areas of the building. Instead of buying property as you would in a traditional real estate transaction, you’re buying a share of the corporation that controls the co-op, which entitles you to living space.

Co-ops are typically more common in crowded cities where the cost of living can be high. The Watergate in Washington D.C. is probably the most famous example of a cooperative, but they’re most common in New York.

There are a lot of co-ops in New York City. According to one report put out by the city in 2018, co-ops outnumber more traditional condo units by a ratio of almost 3 to 1.

This article will cover what you need to know about co-ops if you’re interested. We’ll begin with how a co-op works before moving on to the differences between a co-op and a condo, the benefits and the drawbacks of co-ops and how to buy one. Quicken Loans® currently only finances co-ops in New York.

How a Co-Op Works

When you buy into a co-op, instead of getting a piece of property with a standard deed, what you’re actually getting is a share in the project. Co-ops are typically managed without the aim of earning a profit, with every shareholder tenant sharing in the expenses for maintenance and services.

When it comes to the structure of co-ops, there are different ownership responsibilities to be aware of.

Every tenant is a shareholder in the co-op and you vote on the issues around the co-op similarly to the way decisions might be made within a publicly traded company in the stock market. Your shares also entitle you to exclusive use of your unit within the co-op.

Each tenant gets to vote on and have a say in the rules and management for the collective co-op association. The association as a whole also is responsible for the management of membership fees for the paying of maintenance, property taxes, amenities and any mortgages underlying the physical building or buildings in which units are located.

To help with management, a co-op board is typically elected from those wishing to volunteer. A management company is also often hired to handle the day-to-day decision-making and the administration for the co-op.

Co-Ops vs. Condos

Another common method of homeownership with a lot of common areas and a collective association is the condo. Before we go further, let’s discuss the similarities and differences.

First, let’s look at the ownership itself. In a condo, you actually own the physical property that is the condo. You have a deed. In a co-op, you don’t own the land or the property, but you own a share in the corporation that owns the co-op.

Another difference is in the approval process. The co-op board has to approve your joining the co-op. The process may include both interviews and a review of your financial documentation. When buying a condo, individual applicants aren’t interviewed by the association.

Condos and co-ops are similar in a couple of ways. Both may have common areas, amenities and services provided by the association that greatly add to the value of the property or co-op shares. Because of this, your lender will want to evaluate the viability of the association in order to make sure it can continue to meet its financial obligations and provide services in the long term. Many of the documents used to review the viability of a co-op association are similar to condo review documents. The process includes, but isn’t limited to:

  • Budget review
  • Insurance review
  • A review for compliance with ownership restrictions including that a single entity may only own a limited number of units, and 50% of the units must be occupied as a primary residence
  • Review of the blanket mortgage for the co-op if there is one
  • Bylaws

The Financial Payoff for Condos and Co-Ops

The financial payoff for a condo is equivalent to the potential for owning a house because you own the condo itself. With a co-op, the potential financial payoff depends on the way the co-op is structured.

In a market-rate co-op, members are allowed to sell their shares for whatever the market will bear whenever they want. These are generally the types of co-ops you can get a mortgage on because a lender knows they can base the value of the loan on the value of your share.

In a limited equity co-op, members are limited in how much they can earn from the sale of their shares. There are also group or zero equity co-ops in which no equity is earned at all. You can’t get a loan for these last two and they are typically only used to provide affordable housing options at below market rates. It’s important to know the way the co-op is structured so that you understand what you’re investing in.

The Popularity of Condos and Co-Ops

Although condos are more popular throughout much of the country, in some areas on the East Coast and particularly New York, co-ops are more common.

The primary reason for this is that it’s expensive to live in these areas and co-ops provide a way for their members to share the expenses of living equally. It aids in affordability.

How to Buy a Co-Op Home

In order to buy a co-op, there are three distinct pieces of the process that take place simultaneously. First, there’s the issue of getting approved for a loan. This review has the same review criteria for a traditional mortgage. A lender will look at income, the purpose of the property and its value, as well as your assets and credit.

The second piece which we alluded to earlier was the idea that the co-op association has to be reviewed to determine its stability. Although not exactly the same, the review process has a lot in common with a condo review. One difference is that all co-op construction must be 100% complete to get a loan for your shares through Quicken Loans. Other than that, the review for budget, insurance policies and bylaws is very similar.

The final piece is particularly unique to co-op transactions: You often have to apply for approval before the co-op board, which may include an interview as well as a financial background check.

However, co-op members can only reject your application for certain reasons because they have to comply with the Fair Housing Act. This means they can’t turn you away on the basis of race, religion, disability, etc. In general, the association will ask about two things:

  • They’ll want to know that you agree to comply with the rules of the association.
  • They may review your finances and credit in order to determine if you can uphold your share of the expenses.

One thing to be careful about here is that you often cannot get financing for co-op associations where the association has restrictions on who you can sell to. Quicken Loans doesn’t finance transactions with transfer restrictions.

The Costs and Benefits of Co-Op Living

There are several benefits to living in a co-op. Let’s discuss a few of them here before getting into the pros and cons.

Co-Op Benefits

Many benefits of living in a co-op are the same as the benefits for owning a home or any other piece of real estate. With that in mind, this section will go over things that are unique to co-op living.

For starters, it may help you find cheaper housing in busy metropolitan areas. Because they’re structured as nonprofit corporations, they run at cost. With no profit motive, it’s cheaper to live there in many cases than other housing options.

As an example, let’s take a look at the price difference between the average sale of condos and co-ops in the admittedly expensive Manhattan real estate market. For the second quarter 2018, the average price per square foot was $1,319 for co-ops compared to $2,115 for condos. It’s about a 60% price difference between condos and co-ops in the Manhattan area.

Real estate prices obviously depend on the number of rooms in the unit as well as the exact area you live in, so prices will vary from borough to borough and neighborhood to neighborhood, but this will give you a good baseline of comparison.

There are tax benefits with co-ops as well. You can deduct interest on your loan for your share of the property. You can also deduct your share of the interest on the blanket mortgage the co-op has for the building. There are limits on this deduction. For any real estate purchased after December 15, 2017, mortgage interest can be deducted on property values up to $750,000 for joint filers, and $375,000 if you are married and filing separately. Prior to that, you’re grandfathered in under the old limits of $1 million in terms of property value.

You may also be able to deduct maintenance fees as long as they are for maintenance and not property improvement. The IRS has guidelines, but they get a bit complicated, so we always recommend speaking to a tax adviser or the IRS if you have any questions. The IRS can be reached at (800) 829-1040.

Finally, you can deduct your share of state, local and property taxes up to a combined total of $10,000.

Drawbacks of Co-Op Living

There are certain drawbacks to living in a co-op and we want to go over them a little bit.

To begin with, you have to follow their rules. This somewhat limits your autonomy with regard to what you can do with your co-op and the procedures you have to follow. Make sure you are clear on what those rules are going in.

You’ll have to contribute to monthly maintenance fees equally shared between all the co-op apartment tenants. The cost of this fee can vary quite a bit depending on building size and what’s included within the maintenance fee, but it may include your share of the following:

  • Any underlying mortgage on the building
  • Your share of state and local real estate taxes
  • Upkeep for the building (anything from the heating system to the roof)
  • Building amenities and the union status of the staff also has an impact.

This is not a comprehensive list, but it should give you an idea of some of the things included in a maintenance fee.

Pros and Cons of Living in Co-Ops

Let’s wrap this up by doing a brief review of the pros and cons of co-op apartments.

Pros

  • Lower cost of living when in a major metropolitan area, like New York City
  • There’s a mindset that you’re all in it together and a pride that comes with making things look nice as well as taking care of common areas and resources for everyone’s use
  • There tax benefits that come with any form of homeownership.
  • Having a co-op could open up some areas which are otherwise inaccessible because all the real estate around there is co-ops. If this is the case for your preferred location, a co-op may be worth it rather than a three-hop commute on public transit

Cons

  • The property isn’t yours alone which means you have to follow the rules of the co-op association.
  • Monthly maintenance fees

Quicken Loans finances co-ops in New York in areas where co-ops are common.

If you would like to get started, you can apply online or give us a call at (800) 785-4788. If you have questions, leave them for us in the comments below.

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