What Is A Co-Op? Everything You Need To Know

If you live in a major city, you’re all too familiar with the high cost of buying a home. A co-op can be a great alternative, and it’s a less-expensive option than a condo, for example.

If you’re thinking about purchasing a co-op, read on to learn more about what it is, how it works and how to decide if it’s the right type of home for you.

Co-Op, Defined

A co-op, or 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 shares of the corporation – the co-op association – that controls the co-op, which entitles you to living space.

Co-ops are typically more common in crowded cities with a high cost of living because they cost far less upfront than condos or houses. However, they come with higher monthly maintenance fees (discussed below).

Co-ops are most common in New York City. In fact, co-ops in New York outnumber more traditional condo units by a ratio of almost 3 to 1.

How Does A Co-Op Work?

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 building. Co-ops are owned and managed by a not-for-profit co-op association, with every shareholder tenant sharing in the expenses for maintenance and services.

The Co-Op Association

The co-op association is run according to the its bylaws, which members vote on in case of disputes.

The co-op association is responsible for the management of membership fees to cover building maintenance, property taxes, amenities and any underlying mortgages attached to the property and its units.

The Co-Op Board

To oversee the building’s administration, shareholders elect a board to make decisions about which management company to work with, how to set monthly maintenance fees and when to undertake – and how to afford – major maintenance, renovation and repair.

The Co-op Owner, Or Shareholder

Owners in a co-op building are shareholders, which means they too are owners of the building as well as their apartment. All co-op shareholders are members of the association and therefore are responsible for voting on co-op rules and on how the building will be managed.

Co-op owners are also responsible for paying monthly maintenance fees and any special assessments levied by the co-op board.

The Management Company

The co-op board typically hires a management company to aid the co-op with day-to-day decision-making and management tasks. In larger buildings, the management company typically hires an on-site superintendent to handle common area cleaning and routine maintenance.

Condo Vs. Co-Op: What’s The Same And What’s Different?

It mostly comes down to what you can afford.

What’s The Same:

Condos and co-ops are similar in a couple of ways. Both may have common areas, amenities and services provided by their respective associations 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 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 like 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

What’s Different:

There are a couple of key differences you’ll want to be aware of if you’re just starting to think about buying your own apartment.

Cost Of The Unit

Co-ops are generally half the price of condos upfront, but the monthly fees are typically much higher. That’s because a large portion of those go into paying the mortgage on the building itself. 

Condos are much more expensive upfront because the underlying cost of the property and building is included in the purchase price. In return, monthly charges are much lower because all they are being used for is taxes, insurance and building management.

As an example, let’s take a look at the price difference between the average condos and co-ops in the admittedly expensive Manhattan real estate market. According to the Elliman Report, in Q3 2021, the average price of a Manhattan co-op was $1,313,215, for an average price per square foot of $1,159. In contrast, the average Manhattan condo was $2,528,274, for an average price per square foot of $1,881. That’s about a 52% price difference.

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

In a typical NYC condo association, on the other hand, where the association is only responsible for property taxes and insurance on the complex, the far higher cost of the unit reflects the condo counterpart of the underlying mortgage.

Monthly Maintenance Fee Vs. Common Charges

You’ll have to contribute to monthly maintenance fees equally shared among 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
• State and local real estate taxes
• Upkeep for the building (anything from the heating system to the roof)
• Building amenities
• Payroll obligations, including superintendent, door man, janitorial staff, etc.

Condo fees, on the other hand, are limited to maintenance and routine repair of common areas. Because condos are targeted to the upscale buyer, many associations offer amenities like gyms and pools that may increase their common charges.

Quality of Life

With a condo, you own the space from the walls in. That means that you can renovate as you wish – as long as you abide by condo noise and common area use policies – and there are fewer rules regulating what goes on within those walls, particularly when it comes to matters such as pets.

What’s Different About Buying A Co-Op?

There’s an important difference between buying a co-op and other property ownership arrangements

You’ll Have To Be Approved By The Co-Op Board Prior To Sale

Co-op boards have the power to approve or disapprove of buyers before the co-op sale can go forward. That means that you will have to submit a board package – prepared by your real estate agent – and prepare to be interviewed by the board. 

Some co-op boards are notorious for rejecting buyers out-of-hand, for arbitrary reasons or no reason at all. Many people believe that this is done to enhance the cachet of living in a particular building. 

In general, though, co-op boards simply want to be sure that you can and will pay what’s expected of you on time and that you’re unlikely to cause disturbances in the building.

You’ll Have To Live Your Life According To The Bylaws

If you’re planning on renovating your new apartment, check the bylaws before buying. Co-op boards must approve any renovations you make to your apartment. Your co-op’s bylaws may also contain prohibitions against pets, noise, smoking and countless other areas of your life that you may consider personal.

Bylaws also contain provisions like flip taxes, which you may have to pay to the board when you sell, and subletting policies aimed at preventing subletting. Read them carefully before you buy.

You’ll Have Financial Obligations While You Live There

As we discussed above, as a co-op owner, you’re responsible for your share – based on the percentage of shares you own in the building – of the building’s underlying mortgage, as well as your share of the building’s common fees. It’s called your monthly maintenance fee. That, of course, is in addition to your own mortgage for the shares themselves.

You may also be required to pay a special assessment if the building requires major repairs or renovations while you’re living there.

Co-Ops Offer Tax Benefits

There are tax benefits that come with co-op ownership. If you itemize your tax deductions, you can deduct interest on the loan for your shares of the property, and you can also deduct your share of the interest on the blanket mortgage the co-op association holds for the building.

However, 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. If you purchased your home prior to that date, 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 true 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 (or $5,000 if married filing separately).

How To Buy A Co-Op Share

There are some differences, but in most respects, the co-op and condo mortgage approval processes are very similar.

Step 1: Mortgage Preapproval

First, there’s the issue of getting approved for a loan. This review has the same criteria as a traditional mortgage. A lender will look at income, the purpose of the property and its value, as well as your assets and credit.  

Next, choose a mortgage lender by shopping around for the best quotes. Apply for a mortgage preapproval from the lender you’ve chosen. This review has the same criteria as any other conventional loan. A lender will look at an applicant’s credit score, verify their income and assets, and look at their debt-to-income ratio. Then, they’ll issue a preapproval letter and mortgage limit.

Step 2: Choose An Apartment

The fun part! Finalize your home mortgage affordability budget and go shopping with your real estate agent for your new apartment.

Step 3: Lender’s Review Of The Co-Op Or Condo Association’s Stability

The next step of the process is the lender’s review of the co-op association to determine its stability. Although not exactly the same, the review process has a lot in common with a lender’s review of a condo. One important difference, though, 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.

Step 4: Co-Op Board And Bylaws Approval Process

The final piece is 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.

Co-op boards can reject your application arbitrarily, and have been known to do so. However, they must comply with the federal Fair Housing Act, which means you can’t be rejected based on race, color, disability, religion, sex, familial status or national origin.

In general, the associations should only ask about two things:

• Your finances and credit history
• Whether you understand and are willing to comply with the bylaws

Lenders will also be on the lookout for bylaw provisions that place restrictions on an owner’s right to sell when and to whom they wish.

Co-Op FAQs

Are all co-ops in high-rise apartment buildings?

There is a common misconception that all co-op units are in standard apartment blocks. It’s simply not true. In New York City, for example, co-ops run the gamut from Brooklyn brownstones and low-rises to Manhattan skyscrapers to two-family homes in the Bronx and Queens – and everything in between.

Am I responsible for the building’s maintenance?

As an owner of the co-op association that owns the building, yes. But owners aren’t usually responsible for doing the work themselves, unless they’ve agreed to perform the function – common only in two- or three-unit buildings without a superintendent – to reduce the building’s costs. Most co-ops hire professional management companies to oversee these functions.

Co-ops are often confused with voluntary housing cooperatives, where owners live and work together to reduce fees and foster a sense of community or common purpose. In those arrangements, owners may very well agree to perform community responsibilities.

Can I refinance my co-op mortgage?

Yes, you can. Almost any mortgage can be refinanced – if you’re current on the payments – often at a lower rate and with better terms.

Do you build equity in a co-op?

Not in the strictest sense, no. That’s because you don’t technically own real estate when you buy a co-op, so you don’t build home equity. But your shares will appreciate or lose value along with the rest of the real estate market, and you may still incur capital gains taxes when you sell.

The Bottom Line

If you’re looking for a realistic way to live in a bustling metropolitan area or want to enjoy homeownership without all of the additional responsibilities, a co-op may be a good option for you. But remember, you have to play by the association’s rules. Take the time to weigh the pros and cons and make sure you’re able to get the financing you need.

At this time, Rocket Mortgage^® only finances co-ops in New York in areas where co-ops are common, so if you’re ready to purchase a co-op in New York, apply online to get started today.