Housing Cooperatives: A Unique Type of Home Ownership

Buying a house or renting an apartment aren't the only living arrangements available in the marketplace. Housing cooperatives, colloquially known as co-ops, provide an alternative to the traditional methods of acquiring a primary residence. In this article, we'll explain what a cooperative is and how it differs from other housing options.

Condominiums are multi-unit dwellings with privately owned residences and shared common areas. Condominiums are classified as real property, meaning that buyers own the deeds to their dwellings. If you are considering buying a condo, it is beneficial to research your mortgage options using a mortgage calculator like the one below.

In contrast to condos, co-ops are not considered real property. When you buy into a co-op, you become a shareholder in a corporation that owns the property. As a shareholder, you are entitled to exclusive use of a housing unit in the property.

To purchase shares in a co-op, each buyer takes out a "share loan" instead of a mortgage. These loans operate much like mortgages. In addition to the loan payments, which are made to the lender, co-op residents are responsible for paying a pro-rata share of the costs of running and maintaining the building. Known as the "maintenance," these costs are generally paid to the partnership monthly and are billed on an at-cost basis. Prices rise when the cost of goods and services go up.

The cost of the property's mortgage may be included in the monthly fee: Even if an individual tenant has paid off his or her share of the loan, it's possible for the building itself to have a mortgage on it, held by the corporation, not by an individual partner. The share loan pays the cost of buying into the partnership. It has nothing to do with the underlying mortgage on the property itself. Buyers are entitled to all of the tax deductions enjoyed by homeowners, including the deductions for interest and real estate taxes.

Additional expenses include monthly utility bills for each buyer's residence, which are paid on an individual basis, and insurance costs. While the building itself should be covered under a blanket insurance policy, the contents of each individual residence are not. A personal insurance policy, known as an HO-6, is required to protect personal possessions from water damage, fire, theft and other calamities. 

Co-ops are often less expensive than apartments because they operate on an at-cost basis, collecting money from residents to pay outstanding bills. In areas where the cost of living is high, such as New York City, co-ops may be an attractive option from a financial perspective.

Co-ops must abide by the laws that govern fair housing, but they can be more restrictive than other housing options when it comes to ownership requirements. Because there is no landlord and there are no tenants, the rules for purchasing shares in the partnership are set by the partners. For example, new buyers may be required to have a specific net worth or a certain debt-to-income ratio in addition to demonstrating the ability to meet the financial obligations of the co-op purchase. 

A background check may also be required. Like other types of housing, some co-ops are designed to cater only to senior citizens or other specific groups. These more stringent ownership requirements lend an air of security and exclusivity to co-op ownership. In exchange for this exclusivity, co-ops are generally run in a more restrictive manner than condos. High-end units, for example, may forbid subleasing. All partners share in the costs of operating the building. A default by one partner may require the other partners to cover that partner's costs, although the strict ownership requirements generally keep defaults to a minimum.

The structure of housing co-ops varies, depending on the specific country of its location. In the U.S. and Canada, the most popular options include:

• Market Rate Co-ops: Allow partners to buy and sell shares at whatever rate the market will bear.
• Limited Equity Co-ops: Set restrictions on the price at which shares may be bought and sold.
• Leasing Co-ops: The co-op corporation leases the building rather than owning it and builds no equity. In this case, the co-op may have a cash reserve in hand if the building ever goes up for sale.

In addition to the financial aspect of co-op ownership, there is also a social aspect that must be taken into account. Smaller co-ops are run strictly by the residents, with everyone pitching in to take care of duties, such as maintenance, landscaping and setting rules. Large units may be run by a board of directors consisting of a subset of residents. In either case, there are rules to be followed and a certain degree of social interaction that takes place. If you don't like sharing decision-making authority, co-op living may not appeal to you.

Before buying, you'll want to consider the following:

• Location
• Amenities
• Costs

Because you're buying shares of a company, be sure to check out the company's financial situation and meet the company's shareholders. They'll be not only your business associates but also your neighbors.

Read the co-op's articles of incorporation, bylaws, subscription agreement, rules and any other available documentation. Make sure you truly understand how the cooperative works, including how it is managed, what you will be required to pay for and how much that payment will be. Ask about the terms of any underlying mortgage, the policy toward pets, and your ability to make changes to your residence. There's no harm in asking questions; a little extra effort up front can go a long way toward ensuring a harmonious long-term living arrangement.