The Pros and Cons of Co-op Living

When considering the purchase of a New York apartment, one of the first choices that needs to be made is deciding whether to buy a condominium or buy into a housing cooperative. It’s essential to research all you need to know about co-ops before making an offer on one as they can be quite intricate housing setups.

Co-ops range from high-end and prestigious, such as New York’s iconic Dakota Apartments to affordable and practical, such as the many co-op arrangements found in Brooklyn’s Midwood. While co-ops have many advantages, they also have their own peculiarities that may prove to be advantageous for some and uncomfortable for others.

What is a co-op?

Short for housing cooperative, a co-op is a membership-based legal entity that owns one or more residential buildings. Co-ops are a form of residential housing, along with condominiums and single-family homes, but unlike these more common classifications, they are not considered real property. Co-op residents do not own a specific unit in the building – rather they have exclusive use of a specific unit after gaining membership through buying a set number of shares in the co-operative. The larger a unit is, the larger the number of shares a buyer must purchase.

Usually, new co-ops can be formed by either the builder of a new development, or the residents of an apartment building that goes on sale. In the former case the builder resigns from the co-op association when all shares are sold. In the latter, existing renters of an apartment building may band together and organize into a co-op to purchase the property from the owner.

Co-op characteristics

In the case of real property like condos, owners take possession of the deed to their specific unit, thus allowing them to take out mortgage loans to finance the purchase. However, banks do not issue mortgage loans to finance the purchase of co-op shares. Instead, buyers can take out share loans, which are similar to mortgages, in order to finance the purchase of their co-operative membership.

Special attention needs to be paid to whether the building itself has a mortgage on it. Even if a shareholder has already paid off their own share loan – which financed their purchase into the co-op association – the co-op as a whole is still liable for any mortgage loans taken out on the building itself by the co-operative.

Since co-ops are not considered real property, there are no individual property taxes. Rather, the entire building receives one property tax and costs are divided up among shareholders, usually by virtue of number of shares held. The co-op itself is also responsible for utilities and insurance and normally these costs are divided among shareholders. The organization is also responsible for salaries of any employees like doormen or cleaning staff, typically known as maintenance fees.

Co-ops are usually run by a board of directors elected from the shareholders, but in some cases, a company is contracted by the shareholders to handle the association’s finances and business operations. Since most co-ops are incorporated as limited liability companies, the number of votes a shareholder has is directly tied to the number of shares they hold. However, some co-ops follow the Rochdale Principles that assign each shareholder – regardless of the number of shares they hold – one vote in the decision-making process.

However the voting process is resolved, the board of directors is in charge of establishing and enforcing the rules of the co-op, vetting future residents, ensuring the financial stability of the association and resolving issues pertaining to repairs, maintenance and upgrades. Buyers interested in joining a co-op association need to submit a purchase application package as well as pass an interview with the board. Also known as a board package, the application package usually contains tax returns, employment history, financial and credit information, and references from bankers, landlords, employers, and friends.

Advantages of co-op living

Co-ops are a popular living arrangement in New York, where they represent around half the housing stock. Since the cooperative association is the owner of the property, it bears the maintenance and repair costs, similar to a tenant-landlord arragenement

One of the main attractions of co-ops are lower expenses, as they operate on an at-cost basis, meaning they are not run for profit. Many co-ops, especially smaller ones are run and maintained by resident shareholders, further lowering expenses. Another advantage of coops is that even though shareholders don’t own any real property, they are still entitled to all the tax deductions accessible to homeowners, including real estate taxes.

Disadvantages of co-op memberships

Co-ops are governed by stricter rules than are condominiums. The co-op’s board may implement bans on listing units as Airbnb-type vacation rentals, on subletting, using the property as a pied-a-terre, or on parent purchases.

There may also be stricter rules for financing as a co-op association may accept very little loan financing or none at all. Buyers are subject to intense financial scrutiny when applying to buy into a co-op, making it more difficult to both buy and sell co-op shares, since a seller may invest time and resources to find a buyer, only to have the buyer rejected by the co-op board.

Some co-ops, especially smaller ones, may have very limited staff or none at all. Therefore, shareholders may be required to dedicate a set amount of time for the upkeep of the building. While such arrangements can be beneficial for creating a sense of community and belonging and save on overhead costs, they may be unfeasible for some buyers.

Another risk factor for co-ops comes from its core characteristic of shared ownership – if one shareholder defaults on payments, be they maintenance fees or their share loan, it can affect all members of the association. In extreme cases, all shareholders may be required to cover one member’s default – although the rigorous application process is designed to keep defaults to a minimum.

Co-op types

There are two types of co-operatives: ownership and non-equity. In ownership co-ops, shareholders receive occupancy rights to a specific unit through a title transfer, while in non-equity co-ops shareholders secure occupancy rights through a proprietary lease or occupancy agreement.

From a pricing perspective, co-ops can be divided into three categories: market rate, limited equity and leasing co-ops. As suggested by the name, market rate co-ops trade in tandem with market conditions, meaning partners may put shares up for sale at the price of their choosing. Market-rate co-ops resemble condominium arrangements, although the purchase price will usually be significantly lower than for a similar condo unit, while monthly fees will probably be higher.

In the case of limited equity co-ops, the association will have strict rules on share prices and their appreciation rate in order to keep housing affordable. Leasing co-ops – otherwise known as no-equity co-ops – are a subset of this category and are characterized by a very low purchase price. In the case of leasing co-ops, buying into the association will carry a low price – as low as a rental apartment’s security deposit – and will be accompanied by a higher monthly maintenance fee. This co-op is arrangement is in many ways similar to renting. When a shareholder of a leasing co-op sells their stake in the association, they only receive the low buy-in price they paid, plus whatever price appreciation the association allows.

If you’re interested in a New York co-op, PropertyShark offers property reports for every co-op unit in NYC, from Manhattan’s River House Art Deco masterpiece to The Premier House in Brooklyn’s Midwood. If you have a specific building in mind, just type in the building’s address in our search bar and you can access a bevy of information on on the property from square footage and title documents to the full list of co-op units, as well as detailed reports of the properties themselves. Check out the example below on how to start you search: