All You Need to Know About Buying a Co-Op Unit in 2023

Where Can You Buy Co-ops & How Did They Start?
- Share of co-op units from total residential stock – neighborhood breakdown
What Is Co-op Housing?
Steps to Buying a Co-op
What’s the Difference Between a Condo and Co-op?
- NYC 5-year single family, co-op & condo market evolution
Co-op Housing Pros & Cons
FAQs
Fair use and redistribution

Although uncommon in the U.S. overall, in some areas, co-ops — or cooperative apartments — took hold starting in the late 1800s before later ramping up after World War I, followed by a virtual boom after World War II during the 1950s and leading up to the ’70s. Few areas outside of the Northeast and Midwest’s larger urban centers had the option to buy into co-op housing developments, with only a handful created in Atlanta, Los Angeles, San Francisco and Seattle. In later years, co-ops began appearing in Southeastern Florida and the Southwest, with retirees from the Northeast — especially New York — already used to this lifestyle buying co-ops in large numbers.

Presently, roughly half of all co-ops in the U.S. are concentrated in New York City — especially in its older neighborhoods, where co-ops were first introduced to the American public in the late 19th century. Notably, Washington, D.C. is the only other large city where residential cooperatives make up a noticeable share of the local housing stock. Outside of that, some co-ops still remain in Boston, Chicagoland, Indianapolis, Kansas City, Metro Detroit, Minneapolis and the New Jersey area.

However, as consumer preference shifted in the ’70s from buying co-op units to buying condos, many of the co-ops built up until then have since disappeared. As a result, newer co-ops have been created in significantly smaller volumes, most of which tend to be special interest co-ops, such as affordable housing for low-income families. Of course, the big exception is New York City, where co-ops are a significant rival to condominiums, representing a sizeable percentage of the city’s residential stock, as can be seen below:

While most Americans are familiar with two main types of housing arrangement, co-operative housing lies somewhere between renting and outright deeded ownership, also blending elements of corporate shareholding. A form of permanent residential housing similar to condominiums, the essential characteristic of what is a cooperative apartment is that residents don’t own their home outright but hold shares in a company that owns (or rents) the entire property.

That company then gives exclusive occupancy of a specific unit to potential residents when they buy a specific number of shares either directly from the cooperative or from the resident shareholder who previously occupied that specific unit.

Because of this, cooperative apartments are not considered real property from a legal or tax perspective. Rather, the shares required for exclusive use of a specific apartment are considered personal property — just like shares owned in any company — and cooperatives are considered single-asset companies that have one goal: To provide permanent housing to its shareholders.

The corporation owns the interior and exterior of the building, as well as common areas and individual units. The corporation is managed by a co-op association –referred to as the co-op board. The board is typically comprised of volunteer residents elected by democratic voting and serves for a predetermined number of years. Board members run the co-op in accordance with its bylaws, a set of (often stringent) rules determined by residents.

Most co-ops tend to be multi-level apartment buildings located in dense urban centers. But virtually any form of housing can be organized into a cooperative for any income level. In essence, as long as there’s a group of people (even as few as three or four) who are looking for housing where ownership and responsibility is shared, a co-op can be formed in accordance with state and local laws. However, when researching what is co-op housing, most definitions will only consider market-rate cooperatives and, to a lesser degree – limited-equity housing cooperatives (LEHCs).

Another essential feature that defines what is a co-op apartment versus a condo unit is the board’s power to determine how a resident shareholder may use their unit. This could include banning subleasing; rejecting buyers or the purchase price offered for a unit on the market; or limiting the amount of redecorating that a resident may do in their unit.

Granted, forming a co-op can be a more complex procedure than, for example, buying into a condo development. However, the shared ownership and responsibility that defines cooperative housing brings not only a sense of community with long-term residence in mind, but also generally means lower overall housing costs for all members than a comparable condo because co-ops operate at cost — not for profit like an apartment complex would.

This means that monthly charges (called maintenance fees) — are meant to cover the expenses of operating the co-op, including maintenance, staff expenses, common utilities, mortgage payments (if the building has a blanket mortgage), and special assessments for specific upgrades or repairs. Plus, because usually a co-op is a single-asset, not-for-profit corporation, it cannot legally generate any profit. Although some co-ops (especially in NYC) lease street-level space to commercial operators — thereby generating significant revenue streams — income from such contracts is not distributed among shareholder residents, but rather added to the co-op’s finances.

To that end, some co-ops redirect commercial lease income toward mortgage pay-offs or to offset some utilities, thereby lowering bills for all shareholders. It’s also common for funds generated through commercial leases to be used for necessary upgrades and repairs — instead of charging a special assessment fee to all shareholders — or added to the co -op’s reserve fund for future expenses.

NYC co-op median sale price by neighborhood

There are many types of co-ops that can encompass all forms of residential housing — from pre-war apartment buildings in Manhattan’s most established neighborhoods to mobile home parks in low-density locations — although most tend to be apartment buildings in larger cities. And, because cooperatives predate any federal or state housing regulations in the U.S., they are subject to some types of commercial legislation due to their status as incorporated companies with shareholders.

Co-ops also feature varying degrees of amenities — from a small bike parking area to luxury offerings, like full-service staffing and indoor pools. They’re also governed by a wide array of bylaws established by residents that can define even the smallest of details — like whether large dogs are allowed on elevators — to the most crucial decisions, such as what price a shareholder may charge for their shares (and unit). As such, co-ops can be categorized by several criteria.

Types of co-ops by age:

Pre-war: Built before WWII, pre-war co-ops tend to command higher prices because they usually have desirable architectural features, like high ceilings, large windows, crown molding, arched doorways and thicker walls. They’re also typically located in more central locations and established neighborhoods.
Post-war: Built after WWII, post-war co-ops can range from minimalist, mid-century properties in neighborhoods near downtown/historic cores to later builds in neighborhoods that are further out (but still more central than most condo developments). They tend to have thinner walls due to post-war deployment of more modern materials, like drywall, since because the technology became more widespread in the post-war years.
Newly- built/newly converted: These co-ops represent the lowest percentage of the overall existing stock nationally because new co-ops are rarely created, except in NYC. But, even here, condo development far outpaces new co-ops.

Types of co-ops by elevator:

Elevator buildings are often newer than walkups and have the obvious convenience of ease of movement. However, before buying into an elevator co-op, buyers need to carefully review any use restrictions, co-ops ban using elevators for moving, can have stringent elevator weight limits, enforce strict hours for specific uses, not allow pets on the elevators and more.

Additionally, buyers should ask for clear information on the elevator’s age, as well as the last date and cost of maintenance, as these are some of the priciest maintenance expenses for co-op housing.

Walk-ups tend to be older buildings or smaller co-ops with just a handful of units that only have stairs — no elevators. Buyers looking at a walk-up building need to consider long-term implications, such as larger moving and delivery fees; potential difficulties in the event of temporary or long-term health issues; or additional complications for families with infants. Walk-ups will usually have strict bylaws regarding items that may be left or stored at the ground level, such as bikes or strollers.

On the other hand, maintenance costs will be lower in these types of housing cooperatives because the upkeep of elevators is one of the costliest items on a cooperative’s balance sheet. Moreover, depending on location, age and other factors, walk-up units (especially in NYC) can be up to 15% less expensive from the third floor and up than a similar unit in an elevator building.

Types of co-ops by staff:

Doorman: The co-op will have a uniformed employee who helps residents into the building and screens visitors.
Concierge/Attended lobby: The co-op will have a uniformed employee behind a desk in the building’s lobby. This staff member has similar duties to a doorman and also provides additional services, like receiving packages.
Full-service lobby: The co-op will have both a doorman and a concierge. These can usually be found at high-end, market-rate co-ops and will usually mean higher maintenance fees.
No doorman/No staff: Co-ops without staff tend to be more affordable and are quite common in the case of LEHCs and leasing co-ops, as well as small cooperatives of only a few units. In no-staff buildings, apartments have a buzzer system to screen visitors, instead of a paid employee However, no-staff co-ops will also usually require residents to dedicate time to common duties, such as clearing snow.

Depending on residents’ preferences, as well as the co-op’s bylaws and finances, co-ops can also have a wide range of other staff, just like condos. For instance, some co-ops will hire management companies or specialists to manage the financial and legal aspects of running a co-op, but most have a volunteer system for running the cooperative. and others yet may also have a full-service cleaning and maintenance staff.

Note that co-ops without staff will usually require residents to contribute a certain number of hours toward the upkeep of common areas. While it is less expensive, this type of set-up can prove challenging for residents working long or odd hours; those who travel a lot; those who live with a disability; or residents who simply prefer not to deal with cleaning common areas or helping with the daily minutiae of running a cooperative.

Co-op median sale price NYC boroughs

Types of co-ops by equity

Market-rate cooperatives

As suggested by the name, market-rate cooperatives can be bought and sold at whatever price the market is willing to offer, with the co-op’s bylaws and board of directors having no say in the price. However, because the approval of a co-op board is necessary for a sale to go through, the board may reject a low-ball offer, even if the shareholder is willing to settle for a lower price. This is usually done to avoid lowering the building’s comps.

Market-rate co-ops will usually be more expensive than other co-op types but will still be noticeably cheaper than a similar-sized condo unit. Notably, many market-rate co-ops initially started as limited-equity co-ops, but have since been reincorporated as market-rate, whereas newer market-rate co-ops are developed or financed by for-profit real estate companies.

Moreover, market-rate co-ops will usually target middle- to high-income individuals and will often collect a flip tax — a percentage of the capital gains realized by the owner’s shares. on the sale of Buyers looking for higher-end amenities and with an eye on ROI should orient themselves toward market-rate co-ops.

It’s also worth mentioning that market-rate co-ops can also be placed in revocable living trusts — which may present a significant advantage, especially for high-income individuals. In particular, buyers who want to ensure long-term asset privacy; avoid probate or challenges to their estate; segregate assets among spouses; lower estate taxes (when used with credit shelter trusts); and flexibility of planning may find a market-rate cooperative apartment a more attractive prospect than a condominium.

Limited-equity housing cooperatives (LEHC)

Limited-equity housing cooperatives (LEHCs) generally target low- to moderate-income individuals and families and aim to provide long-term equitable housing, eliminate speculation and protect residents as much as possible from market fluctuations. Buying shares in an LEHC is significantly less expensive than the down payment of a similarly sized condo unit. In most places there are very strict upper income thresholds for buying into LEHCs.

However, LEHCs are not the best option for individuals with an eye on investment, since they generally have strict regulations on pricing, removed from market conditions. LEHCs usually have a pricing formula determined by the co-op’s bylaws that caps shareholders’ gains. Generally, the formula will consider the cost of shares at the time of the seller’s purchase; an annual appreciation rate that will usually fall in line with inflation levels; the value of improvements adjusted by depreciation rates; and the return of principal.

Other aspects may also be taken into consideration depending on applicable statutes and internal bylaws. For example, in some cases, a market price will be determined by the co-op, not to exceed figures defined through the cooperative’s internal equation. In the case of LEHCs, in particular, the co-op determines whether share prices are fixed or adjusted (usually annually) — an important detail for buyers to be aware of.

In the earlier days of cooperative creation, unions or other organized groups (such as mutual aid societies created along cultural lines) were prolific in the creation LEHCs. Nowadays, LEHCs are most often created by non-profit NGOs or organized tenant groups. In some instances, the Swedish mother-daughter mutual principle will be followed in LEHCs, which, in many cases, (especially in NYC) will instantly eliminate the possibility of subletting the co-op unit.

Furthermore, LEHCs may also form in a financially independent setup if the co-op takes out a mortgage on the building or uses governmental assistance funds — such as Section 8 funds (which are paid directly to the cooperative, instead of to the individual shareholder), or, in rarer cases, legacy federal programs (programs that have been dissolved, but still apply to co-ops that made use of them during their operation).

Other types of government financial assistance for co-ops — for example, programs that offer lower interest rates — flow from the state or municipal level. Currently, government or institutional financial assistance programs for cooperatives are far less common than other types of housing, especially for co-ops that are not market rate.

Leasing housing cooperatives

While market-rate co-ops and LEHCs make up the majority of current co-op stock, leasing housing cooperatives are still common and usually have specific income limits. As suggested by the name, a leasing co-op rents the property rather than owning it and, nowadays, is most often created by investors looking to leverage federal income tax credits. While residents don’t own the building, they still manage it as a co-op, with share prices determined by the rental cost of the building and expenses stemming from the creation and maintenance of the co-op.

Buyers who are considering a leasing housing cooperative need to be aware of the cooperative’s lease term and renewal conditions — even if most setups have a long-term contract. What’s more, buyers also need to determine whether the co-op was created with tax credit financing. In that case, the property owner has a legal obligation to offer the co-op the opportunity to purchase the building after 15 years. Note that other arrangements also exist, and leasing cooperatives with some type of government financial aid are not the only ones that will offer the option to buy.

Plus, if a buyer is looking for a long-term residence in a strictly leasing co-op, they could face an unexpected financial burden if the co-op decides to purchase the property. That’s because common charges will then also include mortgage payments and even a potential assessment charge meant to raise funds for improvements. In fact, while buying into a leasing housing cooperative is one of the least-expensive long-term residency options, if the co-op already has a plan to buy the property, monthly charges will most likely include additional charges for a reserve fund to pay for the purchase — potentially leading to an outsized financial burden.

Co-housing cooperatives

A fairly rare setup usually inspired by niche lifestyles and intentional communities (such as those centered around sustainability), co-housing co-ops typically jointly own the cooperative’s land and common areas, as well as a shared main house with recreation areas, guest space and so on, while shareholders own the home they live in outright. In this scenario, shareholders’ homes are generally smaller than the typical American home and everyone has an equal say in community decisions, regardless of the number of shares owned. These communities also tend to be located outside of large urban community centers (often in a more rural setting) and will generally be funded solely by shareholders through liquid assets, as lenders are weary of such arrangements.

Mobile & manufactured home cooperatives

In essence, these communities are similar to traditional mobile and manufactured home communities, with one very important difference: The park’s land is not rented from an institutional or private owner, but rather owned by a cooperative of residents. The co-op also owns any common areas and utilities and is co-managed by volunteer resident. Like co-housing coops, residents here own their manufactured or mobile homes outright, as well.

Usually, these cooperatives are created by residents banding together to buy the land — which may be a challenging prospect due to a scarcity of lenders and financing opportunities. As such, financing is typically sourced from residents or through non-profit sponsorships. One of the fastest-growing types of new cooperatives, these usually provide long-term affordable housing — especially for fixed-income residents — stemming from the cooperative’s non-profit, at-cost operational approach.

Special interest housing cooperatives

Artist housing cooperatives offer long-term, affordable housing to artists and are almost exclusively set up as LEHCs or leasing co-ops. The defining difference between artist co-ops and other types is the incorporation of dedicated art workspaces.

Student housing cooperatives are quite rare and offered only by a handful of colleges in the United States. However, where they are available, they provide a low-cost housing option compared to traditional student housing or off-campus rentals. In this case, becoming a resident shareholder usually requires a nominal fee. Shareholders receive no home equity when they leave the co-op.

Senior housing cooperatives are set apart mainly by their senior- and mobility-friendly design features, with differing levels of home care staff and a minimum age threshold of 55. They can usually be found in areas that already have a noticeable co-op presence or those that draw large numbers of retirees from co-op friendly locations — such as Florida, which has historically attracted retiring New Yorkers.

From an equity perspective, senior housing co-ops can be approached just like any non-special interest cooperative. But they also have some specific niches, as well:

Deep-equity co-ops are comprised of residents who are former homeowners and are using their home equity to buy into the co-op. Additional financing is secured by the co-op via a blanket mortgage.

Zero-equity co-ops are created through federal loan programs and developed and managed by non-profits targeting low-income seniors.
Rural co-ops are also quite rare, mostly because of developer and lender reservations, especially for rural projects

Co-operatives are run by a board of directors, which is usually made up of volunteer resident-shareholders. In rarer cases, board duties pertaining to finances and business operations may be contracted out to a company specialized in the field. When the board of directors is made up of residents, it can involve all shareholders, or a few members elected by residents. The former is typically the case in very small co -ops, such as those converted from a townhouse.

The election process for board members can also vary. Since most co-ops are incorporated as limited liability companies, they normally distribute votes according to the number of shares a resident owns, known as cumulative voting. In this case, the majority of shareholders need to be present, and board members can be elected simply by having the highest number of votes above a specific threshold defined by the bylaws — even if they don’t receive the majority of votes.

Other co-operatives may apply the Rochdale Principle and assign one vote to each shareholder, regardless of the number of shares they own. No matter the type of vote, winners will be usually selected by a simple majority vote or in accordance with how the bylaws determine a winning quorum.

The same voting approach also often applies during shareholder meetings, as well, when issues such as finances; maintenance and capital repairs; by law changes; monthly charges; pet policies; and staff increases — such as hiring a concierge, in addition to a doorman — are discussed and voted on.

A shareholder meeting may also be an opportunity for residents to discuss whether to ban temporary rentals; allow long-term subleasing; change the required down payment threshold; sign commercial tenants (when the building leases street-level commercial space, which is a common occurrence in NYC); or whether residents may leave baby strollers in the lobby of walk-up buildings.

In particular, board members generally handle the financial and business aspects of the cooperative, such as paying property taxes or the building’s mortgage; vetting potential new shareholders; resolving maintenance issues; organizing regular or emergency meetings; mitigating conflicts between shareholders; keeping all financial and governmental filings current; and much more. The number, powers, and duties of a board are outlined in the cooperative’s Article of Incorporation and internal bylaws.

When it comes to buying a co-op, a potential resident must purchase a set number of shares in order to occupy the co-op unit they want to live in. Technically, the price of a co-op home is set by the number of shares needed to occupy it and then multiplied by the price of one share. Generally, the size of a unit is a significant factor in the number of shares it commands.

But just like with condos, a multitude of other aspects may be taken into consideration for pricing, including location, age and any price limits described in the co-op bylaws, as well as economic factors. Below, you can see the price trends differences among the four NYC boroughs — Manhattan, Brooklyn, Queens and the Bronx — throughout the last five years.

NYC co-op price trends

The first step in buying a co-op is analyzing your financials and researching which avenues of additional co-op financing are open to you, if needed. While buyers often refer to this type of loan as a co-op mortgage, it’s officially known as a share loan. And, because co-ops are not real property, the lending and financing opportunities available to condo buyers don’t apply to cooperatives. In fact, most lenders don’t offer loans for cooperative purchases. This results in significantly fewer available financing options for co-ops than there are for real property, like condos and single family homes.

Therefore, individuals looking to become shareholders must thoroughly research co-op financing opportunities specific to their location, since the few lenders that do offer loans for co-op purchases often only offer them in specific locations. They’re also usually only available for the purchase of market-rate co-op apartments (which represent about half the NYC co-op stock), with next to no financing options available for those looking to join LEHCs or leasing co-ops.

Notably, loan pre-approval is often an advantage when submitting the application to the co-op board. Overall, lenders require the same documentation from a potential co-op buyer as they do from applicants looking to finance a mortgage on a single-family loan with two major exceptions: First, lenders will often require a larger down payment for a co-op unit than for a comparable condo as a condition of the loan, even if the co-op itself has a lower threshold. Second, lenders will ask for the financial state and history of the targeted cooperative to ensure the stability of the extended credit.

While reverse mortgages are not uncommon for other types of homes, especially among senior citizens looking to make use of their home equity in their older years. However, historically, this avenue of financing has been closed to co-op buyers and owners, but some places — like NYC — are opening the possibility with new legislation.

Either way, buyers need to be mindful of the overall co-op mortgage (usually referred to as a blanket mortgage), as this will be considered by the board for a buyer’s post-purchase liquidity and is included in monthly maintenance fees.

Finally, after researching the market, most buyers should hire a real estate broker to help them navigate the process more smoothly. Then, once the buyer has settled on a co-op unit in a building that doesn’t have a waiting list and has thoroughly researched the cooperative’s financials, the buyer can make an offer to the seller. And, when both sides have come to an agreement and signed the contract of sale, the buyer can submit their application package to the board.

To live in a co-op home, a potential resident must first go through an infamously challenging (especially in NYC) approval process determined by the cooperative’s board of directors and bylaws.

The first step to getting approved is compiling a winning application package. Also referred to as a board package, this is generally the point where most applicants will be rejected, not at the board interview that follows it for successful applicants – although passing the interview should not be taken as a sure thing. Because co-op bylaws are customizable to each cooperative’s needs and ideas of community, board packages and interviews can vary. However, one universal tip to ensure that a cooperative board package makes a good impression from the beginning is to include a cover letter and table of contents.

Otherwise, all co-op board packages will generally have to include:

The applicant’s net worth, which is often broken down into liquid assets, revenue streams, stocks, real estate and other holdings

Bank and asset verification letters

Bank statements, usually covering the last two to six months

A cash flow statement

An employment verification letter

The applicant’s debt-to-income ratio, which must include any form of debt or loan, including student loans or car payments

Tax returns, usually for the last one to three years

Multiple reference letters from the applicant’s employer or business partners; previous landlords; or personal references

The completed contract of sale

Pre- and post-closing financial statements

A photo ID

A credit check or release form allowing the board to perform a credit check (depending on local legislation)

A background check or a release form allowing the board to perform a background check (depending on local legislation)

A purchase application, also referred to as the applicant information sheet

Signed building acknowledgements, including the corporation compliance letter; terms and conditions; special conditions acknowledgement; pet policy acknowledgement; move-in/move-out procedures; and elevator use restrictions acknowledgement, when applicable

The loan application and commitment letter (for those buying in with loans)

The Aztec Recognition Agreement: the tri-lateral contract between the co-op corporation, the buyer and the buyer’s bank that acknowledges and establishes proceedings in the event that the buyer defaults on their loan payment

Proof of payment of the application fee

The application package is then studied exhaustively by the board, with most cooperatives’ due diligence surpassing that of a bank. In fact, this is one of the major reasons why NYC had a lower foreclosure rate after the 2008 market crash — because this strict process tends to flag and reject applicants who have secured predatory loans.

Generally, the board has the right to refuse an applicant — meaning they can reject any application for any reason other than those that infringe on human rights and fair housing legislation, such as age or religion. And, although co-op boards are not currently legally bound to offer any explanation for their refusal, there have been some legislative efforts to change that.

In the meantime, if the application package is accepted, the potential co-op buyer is granted an interview with the board. Previously, boards used to overwhelmingly mandate in-person interviews. However, COVID-19 ushered in a more accepting attitude toward online interviews through platforms like Zoom.

Regardless, it’s essential for a buyer to thoroughly prepare for the board interview, as the process resembles more of a job interview than a simple formality: More precisely, it includes exhaustive questions, ranging from financials to questions that might be personally intrusive from the buyer’s perspective — such as how often they play musical instruments or details on alimony payments for the recently divorced.

Generally, it’s advised to answer all questions calmly and thoroughly, but not to volunteer any additional information that’s not specifically asked by the board. Other tips and tricks for acing the board interview include not making any remarks on the building’s decor, any unit renovations planned by the buyer or how the co-op is managed. Then, if the interview is successful, and the board accepts the buyer, they can move forward to have the loan processed, finish the transaction, and pay all applicable taxes and fees — such as the flip tax or Mansion Tax.

Lastly, although co-op buyers are not subject to title insurance and mortgage recording taxes, they are liable for attorney fees (payable only if and when a sale goes through) — which typically range between $1,500 and $4,000 in NYC — as well as an additional $1,000 if the buyer has to pay the bank’s attorney, as well. Other costs associated with buying a co-op include real estate commissions, which average 6% in NYC. However, because New York encourages real estate commission rebates, buyers may be able to recoup some of their closing costs.

When the deal closes, instead of receiving a standard recorded deed or title (like in the case of condominiums and homes), new co-op shareholders receive a stock certificate. Outside of NYC, this is is known as a membership certificate of sale and is similar to stock certificates for publicly traded companies. It contains the name of the co-op corporation, the buyer’s name, the number of shares held, the seal of the co-op and other details.

The buyer also receives a proprietary lease (known as an occupancy agreement outside of NYC), which grants them exclusive rights to live in their unit and specifies the number of shares held; shareholders’ rights and responsibilities within the co-op; and the relationship between the shareholder resident and the co-op. The only ownership deed for co-ops is that of the entire building, with the residents’ corporation as the owner.

The buyer also receives a subscription agreement (referred to as a purchase agreement outside of NYC), which serves as the new shareholder’s application to join the cooperative and functions as a binding, two-way guarantee between the co-op and the shareholder. The subscription agreement contains the number of shares sold and their price, as well as the cooperative’s agreement to sell said shares at the determined price and the buyer’s agreement to buy the shares and the stated price.

When it comes to insurance, each co-op must have a master policy, which covers all co-op assets — from common areas and the exterior of the building to the interior of units. However, many co-ops also require new shareholders to maintain co-op insurance, which covers residents’ personal assets and property.

4. What’s The Difference Between Condo and Co-Op?

Considering the many forms that a cooperative can take and operate under, it can be challenging for the average buyer when looking at a cooperative vs. a condominium. Therefore, understanding the essential differences between the two types of housing is essential so that the buyer can make the right decision — both from a lifestyle and financial perspective. Among the most crucial differences is that condos offer more personal freedom, whereas co-ops have the pricing advantage — especially in large urban centers like New York City.

Get an instant overview of the evolution of the NYC single family home, co-op, and condo market throughout the last five years.

NYC co-op market evolution 2016 to 2021

One of the primary differences between condos and co-ops is in how they are viewed from a tax perspective, with condominiums considered real property and co-operatives considered personal property. However, because both forms of housing are considered Class 2 residential properties, both are subject to property taxes. The only difference is how they are paid.

Condo owners pay property taxes directly to the appropriate tax authorities, with each resident responsible for settling their tax bills on time. Conversely, cooperatives have a somewhat different approach: Because a co-op building is under the ownership of one legal entity (the incorporated company that makes up the cooperative), the property tax bill is issued for the entire building.

Consequently, the co-op board (or designated staff) breaks down the full amount per unit by the co-op apartment’s size and/or number of shares. The co-op then determines the appropriate monthly figure and includes it with monthly carrying charges, also known as maintenance fees. By contrast, condo owners generally pay property taxes twice per year directly to the appropriate tax district, just like single family owners.

Overall, this is a simple difference in method of payment, as there is essentially no financial difference in property taxes for a co-op versus a condo when looking at comparable properties. The reason why most condo owners tend to have higher property tax bills is because the majority of co-ops were built before the ’70s, whereas condominiums tend to be in newer buildings with more amenities and higher price tags. As a result, condo owners are charged a larger tax bill.

Note that, if the co-op has a blanket mortgage, co-op maintenance fees will include co-op mortgage costs, as well. These are mortgage costs that are independent from a shareholder’s co-op mortgage. In contrast, condo owners are only liable for their personal mortgage loans.

Furthermore, while both condos and co-ops usually have a reserve fund, co-ops are likely to charge higher contributions. And, if approved by the necessary shareholder quorum, co-ops (unlike condos) may trigger a special assessment, which is an additional monthly fee to fund a specific goal — like emergency repairs — that’s charged for a specific amount of time.

Additionally, it’s important to note that condo owners own the interior of their unit and, thus, may renovate and alter the interior to their liking — as long as it doesn’t affect the unit’s or building’s structural integrity. Meanwhile, the condo association owns the interior of the unit, the exterior of the building, and all common areas and is thus responsible for their upkeep.

For comparison, co-op shareholders have to secure board approval for any changes to the interior because the interior of a unit is also owned by their co-op. For this reason, bylaws and the proprietary lease will specify what types of changes are allowed within a co-op apartment and whether the co-op or the shareholder must cover the costs.

Like any form of housing, there are both advantages and disadvantages to cooperative housing, with some entirely objective — such as the financial liability of cooperatives as a whole if one shareholder defaults on payments — and others depending on personal taste. As with any major financial decision, buyers considering cooperative housing as their primary form of residence need to consider all of the pros and cons of co-op housing — both in the short-term, as well as the long-term.

So, what is the benefit of co-op housing? One of the most obvious benefits of co-op housing is the lower price point. However, it is this exact lower price point that results in the scarcity of co-op units on the market. For example, while co-ops make up about three-quarters of Manhattan’s housing stock, they generally represent only about one-quarter of listings. In fact, it’s not uncommon for cooperatives to have waiting lists — and not just in Manhattan.

Cooperatives’ lower price point may also represent an attractive investment prospect. But, unlike condos — where a new owner may be able to flip the condo unit into a rental apartment and immediately rent it out with few, if any, obstacles from the condo board or management company — cooperatives usually place very strict limitations on subleasing units.

Moreover, while co-ops are generally 20% to 30% cheaper than a comparable condo unit, they also typically require significantly larger down payments. For example, condo down payments tend to represent between 3% and 20% of the unit’s sale price, with 10% being the most common for buyers financing with traditional mortgage loans.

On the other hand, down payments for co-ops (specifically market-rate and LEHCs) start at 20% and often go up to 30%, although they can go as high as 50% or more — in essence, favoring buyers with liquid assets and low debt levels. Co-ops also usually have strict debt-to-income (DTI) limitations, usually requiring a potential buyer’s DTI to be below 30% or even 25%. While qualifying for these standards can prove challenging for some, they’re also one of the main protective measures in minimizing a co-op’s financial risks, such as foreclosures on co-op members’ shares.

Some co-ops ban subleasing, while others might allow subleasing only to relatives. Still others place strict time limits — such as not allowing subleases for the first few years as a shareholder or requiring the shareholder to use their unit as a primary residence every two years out of three, essentially making pieds-a-terre a rarity at best. In any case, whatever limitations a co-op places on subleases, the board may require potential tenants go through a rigorous vetting process and may refuse applicants at their discretion, as long as it complies with the Fair Housing Act.

Additionally, because most cooperatives don’t accept foreign funding for share purchases, foreign investors or buyers outside of the U.S. who are looking for a second home mostly stay away from the co-op market, instead reorienting themselves toward the much more individualistic and profitable condominium market. Other restrictions may also apply when it comes to parent purchases, as well as signing over shares without the board’s approval, except for spouses.

Then again, for many co-op shareholders, it’s exactly this limitation on usage that attracts them because it encourages long-term residency; stabilizes the co-op’s community; prevents damage to both common areas and units; minimizes upkeep; and eliminates potential conflicts, such as residents disgruntled by parties hosted in a unit that operates as an Airbnb.

Taxes are one of the main areas of advantage for co-op shareholders compared to condo owners. When it comes to property taxes, comparable condos and co-ops will not have significant differences in the total bill amount, although co-ops usually have lower bills simply because they tend to be older buildings with fewer amenities than condominium developments.

Additionally, a co-op purchase will usually have significantly lower closing costs than a condo unit — yet again due to its status as personal rather than real property. Specifically, co-ops don’t have to pay a mortgage recording tax like buyers of single family houses or condos do. This can represent up to 2% of the mortgage amount, depending on the value range that the mortgage falls into. Additionally, co-op buyers also don’t have to take out title insurance — which can represent up to 0.5% of the purchase price — because the cooperative already has thorough records on unit occupancy.

However, co-ops can also be subject to municipal and state real estate transfer taxes when the value of shares traded exceeds $25,000. And in NYC, co-op buyers are subject to the New York State and New York City transfer taxes, which can add significant costs. More precisely, the NYC Transfer Tax (also known as the NYC Real Property Transfer Tax (RPTT) is a graduating tax ranging between 1% and 1.425% of the sale price, while the New York State Transfer Tax compounds it with an additional graduating tax between 0.4% and 0.65%, resulting in a combined tax rate ranging between 1.4% and 2.075% of the sale price.

Just like condos, co-ops are also subject to the NYC Mansion Tax, a graduating rate transfer tax that applies to sales of $1 million and above. This can range from 1% of the sale price to up to 3.9% for properties of $25 million or more. But because co-ops are generally less expensive than condos, co-op buyers are somewhat less likely to have to pay this and, as a result, are more likely to pay a lower rate.

Even so, one of the disadvantages of co-op housing is that, while they’re not subject to some of the taxes that condo owners are liable for, co-ops do often have to pay a flip tax. Although referred to as a tax, the flip tax is actually a transfer fee paid by the seller to the co-op association upon the sale of shares. Usually, the responsibility for the flip tax falls upon the seller, but co-op bylaws or the sale contract may require the buyer to pay it.

What’s more, co-ops take a varied approach to the flip tax, and some may refer to it as a capital contribution fee. This can be charged as a flat fee, a percentage of the gross sale price, a percentage of the sale profits (especially in market-rate co-ops) or a flat cost per share. Alternatively, some co-ops may take a hybrid approach and mix multiple (usually two) types of flip taxes.

Granted, there are disadvantages to co-ops, as well. Although extremely rare, cooperatives sometimes default on their blanket mortgage and are foreclosed upon with devastating effects on residents. Even if a co-op shareholder is up to date on their own share loan payments, if the cooperative itself defaults on its blanket mortgage and is foreclosed, the borrower will lose their shares and occupancy rights for their unit. Plus, the shareholder will still be accountable for their personal loans, thereby increasing their financial burden and, thus, the chance of their default, as well. By contrast, a condo owner will not face this possibility.

When a cooperative is foreclosed upon, residents may face imminent eviction from the lender or be given the opportunity to continue as tenant residents — paying rent each month to the lender while still being accountable for repaying their own personal share loans, as well.

Moreover, if a shareholder defaults on their own loan payments or maintenance fees, the co-op might be forced to cover those costs, whereas the only effect a condo owner would feel if another resident faced foreclosure would be potentially lower comps value on their own unit. This is the main reason why cooperatives have such strict vetting processes and financial conditions for potential buyers. As a result, even personal defaults are rare in the world of co-ops. And, when they do happen, the Aztec Recognition Agreement most likely has the next steps clearly stated.

If a shareholder defaults on their personal mortgage or accrues significant debt in unpaid maintenance fees, the board may remove and evict them from the cooperative. However, a co-op may also find cause for eviction with shareholders that breach even the smallest of bylaws, such as owning a pet that exceeds size restrictions.

Conversely, condos cannot directly evict residents for such technical defaults and residents can usually be evicted only after a court-issued judgment against them. And, while shareholders, too, need to be sued by the co-op, the courts — including the NYC Housing Court — almost always side with the co-op board and uphold evictions.

In the end, it’s up to every buyer to decide whether they would prefer the more individualistic nature of condos or the sense of a self-made community that comes with buying a co-op unit. Of course, condo owners enjoy a wider range of freedoms and are able to flip and rent out their units as investment properties, whereas those who buy a co-op will most likely be limited by the co-op’s bylaws. On the flip side, this also means it’s highly unlikely that co-op residents will have to deal with short-term rentals and high resident turnover. And, while, co-ops usually require larger down payments than comparable condos, buying a co-op may be more affordable — not only because of their lower prices, but also from a tax perspective.

If you decide to buy a co-op, make sure you research options in your market. Co-ops are rare outside of NYC — as are lenders that offer share loans in your area — and most have select coverage for co-op financing. Once you decide on a co-op, start researching its financial and maintenance background. Then, familiarize yourself with its bylaws and application package requirements. Finally, once you’ve reached an agreement with the seller, secure a loan pre-approval, submit your application package and thoroughly prepare for the board interview.

1. What is co-op housing?

Co-op housing is a form of permanent residential housing. It’s similar to condominiums, with the major difference being that, while condos are considered real property, co-ops are personal property. When you buy a co-op unit, you don’t receive a deed of ownership for real property (your condo unit). Instead, you buy shares in a corporation that owns the entire building, and you sign a proprietary lease for your unit.

2. How does co-op housing work?

Co-op housing works similarly to an incorporated company, with residents buying shares in a corporation that owns the cooperative, instead of buying a unit outright and receiving a deed of ownership. Each co-op unit is tied to a number of shares. When residents buy those shares, they get exclusive use of the unit through a proprietary lease signed with the cooperative corporation that they are now members of.

3. What is the difference between condo and co-op?

Condos are real, deeded property, whereas co-ops are personal property, like owning shares in an incorporated business.
Co-ops have stricter financial requirements and require larger down payments than condos.
Co-ops are usually sold at lower prices than similar condos.
The co-op board has far more power than a condo board — up to and including rejecting potential buyers.
Condos have far more financing options than co-ops because only a handful of lenders offer share loans to buy a co-op unit.

4. What are the disadvantages of owning a co-op?

Often, co-ops cannot be leased or used as a pied-a-terre due to bylaw restrictions.
Co-ops often have higher maintenance fees, and many also include contributions to the building’s blanket mortgage.
Co-op buyers must go through a rigorous application process, which includes an interview with the co-op board.
Co-ops are more difficult to sell. The stricter financial and personal requirements imposed by co-ops decrease the buyer pool for co-op sellers.

5. What are the benefits/advantages of co-op housing?

Co-ops are usually sold at lower prices than comparable condos.
Co-ops are often located in older, more central and more established neighborhoods.
Co-ops have lower closing costs as co-op buyers don’t have to pay a mortgage registration tax or title insurance.
Co-ops don’t have title insurance. Co-op buyers don’t need to take out any title insurance because they’re buying shares in the company that owns the unit, not the deeded unit itself.

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All You Need to Know About Buying a Co-Op Unit in 2023

Table of contents

1. Where Can You Buy Co-Op Housing?

2. What Is Co-Op Housing?

NYC co-op median sale price by neighborhood