You might be familiar with the idea of a co-op through food co-ops or company co-ops, such as the REI co-op program. Housing co-ops are similar to these types of co-ops; both housing and company co-ops allow members to have partial memberships and an equal stake in the community’s success.
But what does it mean to live in a co-op? How much ownership do you have over your property? Here, we explore those questions and more.
What Is a Co-Op?
A co-op is a community building or neighborhood with a democratic structure. Members of a housing co-op each own a share of the property and vote to decide who should be on the co-op board.
The co-op board is responsible for scheduling building maintenance, which they fund through a monthly maintenance fee from each household.
Most co-ops are apartment buildings, but co-ops can also include college housing, trailer parks, townhouses, or traditional single-family neighborhoods.
How Do Co-Ops Work?
Co-op members do not directly own their units. Instead, co-ops operate like businesses that offer equity to shareholders.
Picture a dividend-offering stock option. If you purchase a share of a dividend stock, you don’t own the company, only the share you bought. Your share entitles you to dividends and a vote for the board of directors.
Owning a share in a co-op works very similarly, but instead of dividends, you receive a unit to call your own, and instead of a vote for the board of directors, you receive a vote for the co-op board.
Is a Co-Op the Same Thing as a Condo?
Co-ops and condos are similar but are not the same thing. Some significant differences between condos and co-ops are essential to understand if you’re considering buying one or the other.
If you purchase a condo, you own your apartment. While the hallways and exterior of the building do not belong to you, you will have a deed that outlines what you own, and it’s yours to do with what you wish.
In a co-op, you don’t own the whole property. You own a share of the property, and in exchange, you are allowed to live in a unit of the building or on a piece of property in a larger neighborhood. The co-op association owns the property, and you will not have a deed or ownership rights.
Advantages and Disadvantages of Co-Op Ownership
Like any other type of home ownership, co-op ownership has unique benefits and drawbacks. In some ways, co-op ownership is easier than living in a traditional home. For some people, the benefits of this kind of cooperative structure aren’t worth the drawbacks.
Before making any living commitment one way or the other, it’s essential to understand what living in a co-op entails so you can make the best possible decision for yourself and your family.
The Benefits of Co-Op Ownership
Co-ops aren’t a very common type of housing- only about 1.5 million Americans live in co-ops (less than 0.5% of the country). Nonetheless, those that live in these communities often love them for their unique benefits and sense of community.
Community Feel
Because co-ops operate with collective ownership, they are perfect for those that want a strong sense of community. These private communities are very strict about who they let in (though they must abide by housing protection laws), so you’ll likely be surrounded by like-minded individuals.
Co-ops are also typically strict about whether or not rentals are permitted. If the co-op allows rentals, they must often be long-term leases only.
Because of these rental restrictions, those living in the co-op are almost always long-term residents. And because these residents usually have an actual stake in the community’s success, you will typically see widespread voting participation and a feeling of shared responsibility for the building.
Location
While some co-ops operate as collections of single-family homes, most are similar to apartment buildings or condos in large cities. Choosing to live in a co-op will often mean you can live in or near the city center- an option that might be too pricey for an individual.
Amenities
Co-ops are owned and operated by a large collective. Because of this, members pool resources to access amenities that are too capital-intensive for individuals to afford. These community resources can include community pools, gyms, playgrounds, community gardens, and more.
As a co-op member, you and other community members will have access to the community’s amenities. These are also great places to meet other community members.
Tax Benefits
Though they don’t apply in all cities or regions, there may be certain tax benefits associated with co-op ownership. In some areas, co-op members can deduct the interest of their personal loan (which they use to pay off their portion of the property) from their taxes. Additionally, some maintenance fees may be tax deductible.
These benefits are in addition to tax benefits that traditional homeowners enjoy.
Financial Benefits
One of the major factors that draw in co-op owners is the financial benefits. Co-ops are run as non-profits. Because everyone in the co-op lives in the building and pays the same dues, there is no incentive to create a profit for a landlord or lender.
The only ‘profit’ made from a co-op collectively is the underlying mortgage, which initial co-op members had to take out to fund the initial purchase of the property. Everything else is funded at cost, from maintenance to property taxes.
The Drawbacks of Co-Op Ownership
While many enjoy the benefits of living in a co-op, the decision isn’t right for everyone. The limitations and drawbacks of co-op ownership are just as important to understand as the benefits.
Limited Autonomy
In a co-op, any decision that affects the whole community must be made collectively. While this sense of community is important for some people, others prefer to strike out independently and make decisions about their homes and property without input from their neighbors.
For example, if you live in a co-op, your community may want to add a garden or playground to the property. Even if you’re not interested in using these amenities, if the rest of the co-op agrees to add these features, you will have to do your part in funding and caring for them.
Additionally, many co-ops regulate what is and isn’t allowed within your unit. These regulations may include whether or not you can rent out your unit, have pets, and which renovations or upgrades you can make to your living space.
Limited Liquidity
In traditional home ownership, if you want to move or change cities, you can list your home for sale at any time, at any price, and accept any offer that works for you. Even in condos, it is your right to sell the property you own to anyone you like.
In a co-op, the board and community can turn down new members that offer to purchase your share for almost any reason. The board might also want to wait for a better sell price to increase the value of the community.
These factors can make it very difficult to leave a co-op, especially if the market isn’t in your favor.
Limited Privacy
For many, co-ops make city living accessible and affordable. However, not everyone wants to live in dense urban areas.
If you want to live in a rural community, you will likely have a more challenging time finding a co-op. While there are some co-ops in smaller cities throughout the United States, they are much more limited.
Financial Issues
For some people, co-op fees will be more expensive than their utilities would otherwise be. Each co-op member will pay a percentage of the bill for operating the building- whether that’s the underlying mortgage, electricity bill, or maintenance.
Most co-op owners have smaller mortgages, but many have higher monthly fees from the co-op association than they would in a condo.
Some people prefer to have a higher mortgage than a maintenance fee because mortgages can be paid off, while monthly fees are in effect for as long as you own your share.
Ownership in a Co-Op
Ownership in a co-op can look different depending on the co-op and the people within it. However, there are some things that most co-ops have in common, regardless of where they are or who they serve.
Here is a general outline of what you can expect if you move into a co-op.
The Responsibilities of Co-Op Shareholders
If you buy into a co-op, you will have many responsibilities to keep your community up and running. Most of these responsibilities you will share with others in your community, and some will be up to you.
You and everyone in your building will be responsible for paying their maintenance fees. These fees are essential to keep the property in good condition and safe.
Everyone in a co-op also has the responsibility to take part in the governance of the building. This includes voting in elections for board members and taking part in decisions that affect the entire building.
Once you and everyone in your building have collectively decided on the rules and regulations for your community, you will have to follow them. This might include rules about renting out your unit, allowing pets in the building, and maintenance rates.
The Rights of Co-Op Shareholders
Just because you don’t own the unit you live in in a co-op does not mean that you don’t have certain housing rights.
If you choose to purchase a co-op share, you have the right to live in an agreed-upon unit for as long as you own your share. While there may be certain regulations about what you can do with your property, it is still yours to use in most ways.
Within this unit, you have a right to privacy as much as any other tenant or homeowner. Co-op owners can choose to invite whoever they like and not invite other members of the community if they so choose, barring certain emergencies.
Additionally, you have the right to participate and help decide on issues that affect you and the entire building. You are always allowed to vote in elections about big decisions and about who gets to be on the board.
You and anyone else in your co-op community have the right to access common areas that you pay for in your community. If you own shares in a condo-like building, this might include a pool, gym, or a variety of other amenities.
If you ever want to leave your co-op, you can sell your shares and move out. While the co-op board can decline certain buyers and regulate how you sell your property, you maintain a certain level of freedom to leave the co-op when it comes time to move out.
Purchase and Maintenance of a Co-Op
Funding your co-op shares is very different from funding the traditional purchase of a home. While homes and condos are typically financed through mortgages, co-ops are funded through share loans. Some mortgage lenders offer share loans, but most do not.
However, some specialized lenders provide these loans. Because they are shared loans and not mortgage loans, certain rules and regulations that protect home loan takers do not apply.
Maintenance costs are mostly covered by the pool of money collected by the co-op association. If large, expensive repairs are needed, co-op associations may take out a second blanket mortgage on the property or raise additional funding from shareholders.
To protect yourself from these significant costs, make sure that you understand the financial situation of a co-op, the state of their building, and their future repair plans before you apply.
Types of Co-Ops
If you’re considering buying a share in a co-op, it’s essential to understand the different kinds of co-ops and how they work, including how they manage finances, maintenance, and responsibility.
There are two primary kinds of co-op management: market rate co-ops and limited equity co-ops. Both kinds of co-ops use a democratic structure and collective ownership to manage their residents and shareholders.
Still, they have different financial structures that have a significant impact and those in the co-op.
Limited Equity Co-Ops
Limited Equity Co-Ops (LECs) follow a less common type of co-op model. In a LEC, the co-op sets rules that limit the prices of shares. LECs are also more likely to have tight income restrictions that make them less accessible than other co-op models.
In a LEC, it’s possible to purchase a condo in a high-priced urban area for just tens of thousands of dollars rather than hundreds.
This low price point makes LECs a highly desirable option for those with restricted or low incomes in expensive urban areas.
The high demand and low number of LECs, however, mean that most people will never have the opportunity to join. Some LECs have waitlists that last several years, occasionally as long as decades.
While LECs are very low-cost, they also have very little return for homeowners. The limitations that make these apartments so affordable also mean that sellers can only list their shares at co-op board-regulated prices.
The other major difference between a LEC and a market rate co-op is how taxes are applied. While most LECs follow standard property tax rates for their area, some LECs are tax-exempt from local property taxes.
Outside of financing, LECs are largely the same as market-rate co-ops. Equity holders will pay into the pool of money used to maintain their building and vote for board members, who will be tasked with planning building operations.
Market Rate Co-Ops
Market rate co-ops are more common than LECs. The basic form is the same as a LEC, but there are not as many regulations about the cost of shares.
Someone leaving the collective ownership of a market rate co-op can list their shares at the current market rate. While the co-op board still gets to decide who is allowed into the co-op, for the most part, anyone is welcome.
It is more capital-intensive to join a market rate co-op, but because your shares increase in value over time and you build equity, it’s a better long-term investment.
If your home ownership priority is building equity and maintaining long-term yields, market rate co-ops are a better option. However, if your primary goal is to find inexpensive housing, limited equity co-ops are better.
Key Takeaways
A co-op is a type of property ownership where everyone in the community contributes to a piece of property to fund maintenance and ownership of the land.
No one in the co-op owns the property or any portion of the property. Instead, they own shares of the property and contribute to maintenance costs in exchange for the right to live in a unit.
Co-op ownership isn’t right for everyone. Certain restrictions apply to co-op owners that many people find limiting. For example, the co-op can regulate the renting out of your property, who you may sell your shares to, and the price at which you list your shares.
However, many people enjoy co-op property ownership. Co-op living comes with a deep sense of community and shared responsibility for shared spaces. You will have less turnover with your neighbors, allowing you to build strong, lasting connections.
If you’re interested in buying into a co-op property, you can check out listings near you whenever you’re ready to start.
FAQs: What is a ‘Co-Op’?
These are the questions we see most from those considering moving into a co-op.
What does it mean to do a co-op?
Joining a housing cooperative or housing co-op means owning a share of the overall property in exchange for a piece of the property to call home.
What is a co-op, and how does it work?
A co-op is a type of property ownership where members own a share of a property rather than the property itself. They operate as non-profit corporations with a democratic structure.
What is the point of a co-op?
The point of a co-op is to share responsibility with everyone in the community. By having shared ownership and responsibility, co-op members and residents are more committed to their communities, creating a more robust network and a better place to live.
What are the disadvantages of a co-op?
The main disadvantages of co-ops are that owners have limited autonomy and privacy. Co-op owners also often pay higher monthly maintenance fees than those with houses or condos.
What are the benefits of living in a co-op?
There are many benefits of co-op living. Most significantly, they are often less expensive than condos and have more owners living in them than a Homeowners Association (HOA), so there is a greater sense of community and extra care for the building.
How is a co-op different from an apartment?
A co-op is different from an apartment because co-op owners have partial ownership, and apartments typically have renters who don’t have ownership rights.
Is it worth investing in a co-op?
Whether or not it is worth investing in a co-op depends on the kind of property you want and the lifestyle you have. A co-op might be a good investing option if you want a community-focused living space and don’t mind paying higher than typical rates.
How do co-ops make money?
Co-ops don’t make money because they are not operated for profit. They fund operations by collecting monthly maintenance fees from co-op owners.
What is an example of a co-op?
Typically co-ops are apartment complexes, but they can also be neighborhoods of single-family homes, mobile home parks, or student housing. The biggest co-op in the world is Co-op City in The Bronx, New York City, which has 15,372 residential units in 35 buildings.
How is co-op housing different from regular housing?
In a co-op, you don’t own your unit directly. Instead, you own a share of the building, which entitles you to your unit. Regular housing is the inverse of this- you own your property or unit but not the building or neighborhood in which it is located.
How is a housing co-op similar to a food co-op or a company co-cop?
Housing co-ops, food co-ops, and company co-ops are similar in that they emphasize cooperative ownership and collective decision-making. They have the same cooperative structures and share the same co-op business models.
They involve a group working together to ensure everyone’s needs are met, from securing fair housing or agricultural produce prices to providing collective goods and services.
Through mutual aid, housing co-ops strive to address the issues of inner-city residents by making common ownership of property an achievable goal. Food co-ops are agricultural production cooperatives that promote more environmentally sustainable practices by offering goods in bulk at reduced cost while supporting local farmers.
Similarly, company co-ops give employees control over their workplace while strengthening their community by pooling resources. These types of cooperative structures have a shared commitment to more robust financial returns, better products and services, and greater stability for those involved in the coop system.
