Purchasing a home is one of the goals that many families have around the world. If you cannot afford to be an owner, then renting an apartment, condominium, or single-family home is still an exciting experience. These options are also not the only living arrangement options which are available in the modern marketplace.
Housing cooperatives provide an alternative to the traditional methods that families used to acquire a primary residence. Co-op housing requires that you become a shareholder in a corporation that owns the property. Because you have this partial ownership, you are than entitled to the exclusive use of a housing unit. Co-ops are not considered real property, but you will take out share loans to purchase your share.
In addition to the housing expense that is similar to a mortgage, each resident is responsible for paying their prorated share of the costs to maintain and run the building. Most arrangement require that the costs be paid to the partnership each month and billed at an at-cost rate. If the price of services goes up, then so do the expenses that you pay.
List of the Pros of Co-op Housing
1. Cooperatives do not operate on a for-profit basis.
One of the primary attractions to the idea of a housing cooperative is the fact that there are lower expenses associated with living under this arrangement. The partnerships which manage the real estate where the housing unit exists operate on an at-cost basis, which means you don’t have a profit margin built into your final expense. Smaller units that are maintained by resident shareholders can experience this advantage at an even greater level.
2. You are still entitled to the same tax deductions.
Even though you do not own any real property when you join a housing cooperative, you still receive the same tax deductions which are accessible to homeowners. This advantage includes real estate taxes as well when you file your return. The shares act like a mortgage for your finances, so you get to be in a home where you control the outcome of the structure without interference from a landlord. Although you will likely need to pay a building manager or other staff on a prorated basis to maintain the investment, the arrangement saves you money in many different ways.
3. Some co-op housing arrangements allow for a title transfer.
There are generally two types of housing cooperatives which investors can find when looking for housing today: non-equity and ownership. If you have an opportunity to join the latter option, then you will receive occupancy rates to a specific unit in the building or on the property in question through a title transfer. When you join a non-equity shareholder partnership, then you secure the occupancy rights to the unit in question through a contract or proprietary lease instead.
4. You can even profit from an investment into a housing cooperative.
Co-op housing tends to come in three different investment opportunities. You can find leasing cooperatives, equity opportunities, and market-rate shares available when looking for a place to live. When you join a market-rate partnership, then your shares trade in tandem with the current economic conditions. Partners Kennett therefore put up their shares for sale at a price of their choosing. Equity co-ops may have strict rules on share prices and how they appreciate to keep costs low. Leasing arrangements have a low entry price, but provide little (if any) equity.
5. You have the option to shop around for the best possible deal.
When you start to look for co-op housing in your neighborhood, community, or city, then you will quickly find that they are not necessarily organized in the same way. Just as you would shop around for the best deal on a home or condominium, you can look for a housing cooperative that will give you share access at a price you can afford. The differences in the methods of organization can be striking and costly if you choose the wrong one. When you visit a project or apply to a partnership, take written notes on the costs, responsibilities, and overall structure of the co-op to make sure it’s a good fit for you.
6. It is possible to talk with current tenants and previous owners.
There are times when it can feel like a co-op housing arrangement feels like a secret society. You can show up, tour a unit, and deal with a robust sales pitch to onboard your family. Before you sign anything, you do have the right to speak with current tenants about their experience in the building. Avoid speaking with current or previous board members since they may have an alternative agenda. Then seek out references from those who have sold their units to see why they decided to move on. If you do not feel comfortable after hearing their answers, then it is time to look somewhere else.
7. This structure brings democratic principles to your living arrangements.
If you rent a property, then the actions you take while living in that unit must receive permission from the landlord. When you purchase a home, there can be an HOA which regulates the exterior color of your house, how tall your lawn can be, and even if you can display flags, post political signs, or have pets. When you decide to join a housing cooperative, then the members get to vote on any changes they want. Board members are elected into their position. This structure creates stability in the living arrangement so that as people come and go, the quality of the property remains.
8. Co-op housing shares can build equity.
Some people want to build equity in their home without having an interest in the expenses or responsibilities that come with that ownership. If you can join a larger co-op, then a paid crew will handle security, maintenance, and repairs when they are necessary. You are not asked to take care of any gardens or laws. Exterior maintenance is handled by the board as well. You get to build equity with each payment without dealing with the regular to-do lists that homeowners often face.
List of the Cons of Co-op Housing
1. There are strict rules that you will need to follow in co-op housing.
Co-op housing arrangements are generally governed by stricter rules then you will find with condominiums or a traditional lease. The board of directors for your partnership may implement bans on listing your property on home-rental sites like Airbnb, forbid any subletting, allow for parent purchases, or use the property as a second home. If you violate any of these rules, then the agreement you signed when purchasing shares may require you to forfeit your investment. Even if you receive a partial or full refund, a violation can act just like an eviction.
2. You may find that there are stricter financing rules to follow.
Because you are purchasing into a partnership or association with a housing cooperative, there could also be strict rules in place about how you finance this investment. Buyers are often subjected to intense scrutiny when applying to purchase shares in a co-op. Some associations may not except any loan financing at all, requiring you to provide a cash payment instead. This structure can make it challenging to buy and sell shares since it becomes the responsibility of the seller to find a qualifying buyer who can meet the demands of the cooperative.
3. There may not be any staff available for the co-op housing units.
Many of the smaller housing cooperatives have very limited staff resources to help maintain the building or property where the units are in place. There may not be anyone at all to manage the property either. When you encounter this situation, then it becomes your responsibility (along with every other shareholder) to dedicate a certain amount of time to provide for the upkeep of the structure. This process can help to reduce your overall costs, but it can also require a lot more of your time during days when you may not have any to give.
4. Member defaults can impact the entire housing cooperative.
Co-op housing relies on the financial well-being of every member in the partnership so that it can be successful. If one of the shareholders defaults on their payments, even if it is only on the maintenance fees and not the share loan, then it can impact all of the members of the association. In extreme circumstances, all shareholders might be required to cover the past due payments of a member in default. That is why there is a rigorous application process in place to join a housing cooperative in the first place.
5. You may still be living on a mortgaged property even if you paid off your share.
Because you are not purchasing a mortgage when you join a housing cooperative, it is possible to pay off your share of the partnership while the property or building you live in continues to maintain a mortgage. This structure can put you into a challenging financial position if the membership fails to pay their monthly obligations after you have taken care of your responsibility to the group. It is legally possible to find yourself dealing with a foreclosure notice even though you have no debt responsibility to the overall membership.
6. Your investment will not experience the same levels of appreciation.
Because cooperative housing is an alternative form of acquiring a residence, the investment opportunities under most circumstances are rather limited. Your shares will not appreciate at the same level as a real estate investment would under equal market conditions. Even condominiums tend to provide more of a return for investors over time when compared to what is available in the best co-op housing arrangements. If your goal is to see the value of your entry grow over time, then you are usually better off saving up for a down payment on tangible real estate than trying to invest in a cooperative.
7. The rules imposed on unit owners can be very different.
You must obtain a copy of the written rules for the unit under consideration before finalizing any agreement to join a housing cooperative. Some of them will control the value of your unit, while others will limit your voting rights based on your compliance with the contract. Review all of the bylaws to see how any rules can be changed since you are buying into this agreement. If you do not understand anything, then have a legal professional review the contract for the shares with you before transferring any funds.
8. Some co-op housing units do operate on a for-profit basis.
Although there are numerous housing cooperatives who label themselves as being a non-profit and specific laws can regulate development activities, some partnerships can focus on profits first. The rules can become whimsical and complex, which can create personal rifts between members and the board. Some of the horror stories that people have shared with Realtor.com about co-op housing involve playing favorites with specific members, failing to release compensation checks, and even embezzlement.
9. Just because a unit is available doesn’t mean it is a good place to live.
It is imperative that you ask the right questions if you are thinking about making an investment into co-op housing. How many of the units are currently vacant? What are the re-sale numbers of the property in the past year? Then ask about what the annual budget is for maintenance and repairs. Make sure that you ask to see the budget before signing anything, because a lack of transparency in this regard is a definite red flag.
When you tour the property, look for places where deferred maintenance or unprofessional repairs have taken place. Review the actual structure of the property and the materials used to build it. Ask about any upcharges that may be in place, how managers are paid, and what it takes to replace someone.
10. Your investment is usually equal to what a down payment requires.
Although the cost of a housing cooperative share is usually less than what you would pay as a mortgage, the same rules for taking out a loan apply. You will usually need to make a down payment of 10% to 20% to have your application approved. Some partnerships allow you to roll the maintenance fee into your repayment plan, but it can also be kept separate. If your savings account feels a little light, then a traditional rental agreement is a better solution until you can put enough away to make this initial investment.
The pros and cons of co-op housing usually apply to metropolis living arrangements, although the number of available shares in the suburbs are increasing in recent years. Over half of the available units in New York City right now fall into a housing cooperative category. These key points can help you to determine if this alternative method of arranging a place to live can help you to find the perfect home.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.