How Housing Cooperatives Work

By: Sarah Siddons

Housing co-operatives originated in New York City and now provide homes to more than 1.5 million people in the United States. See more real estate pictures.
Rob Schoenbaum/Time Life Pictures/Getty Images

The Beatles' John Lennon belonged to one. Madonna was rejected by one. So was former President Richard Nixon. What are they? Housing cooperatives, known as co-ops for short, are highly common in places like New York City, but few people understand how th­ey operate.

With the surge in condominium ownership, many people have become familiar with how condo associations function. Co-ops share some of the same qualities: They contain multiple units of housing, are governed by bylaws and operated by elected officers and directors, and require occupants to share in the cost of maintenance and utilities in the form of monthly fees. But there are distinct differences, mostly pertaining to the nature of ownership.

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When you acquire a home in a housing co-op, you don't actually buy real estate -- you buy shares in a corporation, whose only asset is the property. This corporation owns the home you live in; you own no greater part of it than any other member. You gain the right to occupy it through what's called a proprietary lease or occupancy agreement.

When you move, you sell your stock in the co-op. In some co-ops, you may have to sell it back to the corporation at the original purchase price, with all the stockholders sharing collectively in whatever profit is made when the shares (unit) are resold. In others, you get to keep the profits.

On the next page, find out what makes co-op ownership appealing to home buyers, and also why it can be hard to get into a co-op.

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What's so great about co-ops?

Would you want all these flashbulbs going off next door? Co-ops often reject celebrities.
Would you want all these flashbulbs going off next door? Co-ops often reject celebrities.
Brian Ach/WireImage/Getty Images

One of the most attractive features of co-op ownership to a lot of people is its tax advantages. Payment of taxes for the building is shared by the entire co-op, so as a shareholder/tenant you don't receive an individual tax bill. Rather, your portion of the tax burden is included in the maintenance, or carrying fee you pay to the co-op each month. At the same time, you enjoy the same federal income tax deductions for your share as any other homeowner does.

While a condo owner can freely sell his or her home to anyone, the common-ownership element of a co-op means its bylaws usually require potential shareholders to be approved by the board of directors. That means the co-op gets a say about who can move into the building and who can't. (This can be a good thing if you're already a co-op owner, not so good if you're trying to get into one.)

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The approval process includes a close examination of the applicant's finances. This doesn't necessarily mean you have to be rich; the board just wants to know that you are a responsible, gainfully employed person who pays your bills and doesn't default on your debts. This process may seem restrictive on the surface, but there's a good reason for it: If one tenant defaults on his or her part of the mortgage, maintenance and tax payments, all of the shareholders have to pay for it.

In a condo, if you don't meet your mortgage or tax obligations, liens are placed on your property, preventing you from selling it. But in a co-op you're a co-owner of your home, so all the other owners are on the hook for your failure to pay. If this happens, the corporation may be unable to shoulder the burden, and the property may be lost to foreclosure -- and all the shareholders' interests along with it. Now you can see why co-op boards carefully scrutinize prospective buyers. One bad shareholder can bring everyone down.

The board approval requirements also apply to tenants if you ever need to sublet your co-op. Some co-ops restrict subletting by placing time limits and other controls on it to preserve the integrity of the corporation.

Such scrutiny usually results in an overall high caliber of owner -- co-op shareholders are likely to be financially responsible individuals who adhere to the organization's rules and genuinely care about the best interests of the property and corporation. As a result, co-ops generally have low default rates and low turnover of occupants, another attractive feature of this type of ownership.

Read on to learn about more advantages of co-op ownership, and the different types of cooperatives.

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Types of Housing Cooperatives

Not every co-op is urban. As concern about environmental damage has grown, some groups have founded co-ops such as the EcoVillage in New York, devoted to sustainable living.
Not every co-op is urban. As concern about environmental damage has grown, some groups have founded co-ops such as the EcoVillage in New York, devoted to sustainable living.
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In addition to the tax benefits and low turnover rates, co-ops have other advantages:

  • Financing: Home loans carry favorable lending terms, including low down payments and closing costs. In a co-op building that carries its own mortgage on the property, buyers must obtain less financing than a condominium buyer would need.
  • Limited liability: While you're responsible for paying your personal loan, as a shareholder you have no personal liability for the co-op's mortgage.
  • Community control: Shareholders participate in property decision-making.
  • Consumer clout: As an association, co-ops can exert influence on local governments and utilities.
  • Surplus revenues: In some cases, unspent funds are returned to the shareholders (think of the dividends you receive from your stock in a company), although they may have to be reported for individual income tax purposes.

So with all of these good things attached to co-ops, you're probably ready to run out and apply for one. Well, not so fast. First, you need to figure out what kind of co-op you're looking for. As described below, co-ops are not only for well-heeled Manhattanites. They're a concept that works for all income levels through their various types, and can be vehicles for economic development.

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  • Market-rate co-ops are just that -- you can buy or sell your interest in them at whatever price the market will bear. You acquire equity much the same as in other types of home ownership.
  • Limited equity co-ops are usually properties designed to offer affordable housing, and carry certain benefits such as lower-interest loans, tax breaks and grants. In return for the reduced costs of ownership, there are restrictions imposed on how much equity tenants can accumulate and how much they can profit from the sale of their stock in the corporation. These co-ops work for people whose income otherwise would not qualify them to purchase a home.
  • Leasing co-ops: Also known as zero-equity co-ops, these properties are owned by outside investors (usually nonprofit organizations) who then lease the property back to the corporation. The co-op may buy the property later if it comes up for sale and convert it into one of the other types of co-ops.
  • Mutual housing associations: Nonprofit corporations established to develop, own and operate housing. The corporation is owned and controlled by the residents who move in.

There are also co-ops designed for elderly residents, co-ops subsidized by the government and rural cooperatives designed to assist farmers. To find out more, just follow the links below.

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Housing Cooperative FAQ

What are the advantages of cooperative housing?
The tax advantage is one of the biggest draws to cooperative housing, as taxes for the building are shared by all residents and no one receives an individual bill. Yet, you still get to enjoy the same federal income tax deductions for your home as any other homeowner. Additionally, buying into a co-op tends to be cheaper than buying a condo or other home.
Are co-ops a good investment?
It depends on the particular co-op. In some, you're required to sell it back to the corporation at the original purchase price and the other stockholders collectively share in whatever profit is made when your unit is resold. In others co-ops, you get to keep the profits. Be sure to know the answer to this before you buy into a co-op, as it affects your ability to build equity.
How does a housing cooperative work?
When you move into a home in a housing co-op, you don't actually buy a piece of real estate. Instead, you buy shares in a corporation whose only asset is the property and gain the right to occupy your home through a proprietary lease.
Can you get a mortgage for a co-op?
It can be very difficult to get a mortgage for a co-op since you don't actually own your unit. Instead, look into a co-op loan or share loan, which can be found through lenders such as credit unions.
How do I find co-op housing?
There are a few different ways to go about finding a co-op, but one of the most straightforward avenues is to search the National Association of Housing Cooperatives' online database. Regardless of where you decide to apply, expect the process to be rigorous. Co-op members get a say in who is allowed to buy in and who isn't. This results in an overall higher caliber of owner, but it may mean that the co-op rejects your application.

Lots More Information

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More Great Links

  • National Association of Housing Cooperatives
  • National Cooperative Business Association

  • Galaty, F., Allaway, W. and Kyle, R. Modern Real Estate Practice in Illinois, 4th edition.
  • Dearborn Financial Publishing: 2001.
  • National Assoc. of Housing Cooperatives
  • National Cooperative Business Assoc.
  • Siegler, R. and Levy, H. "Brief History of Cooperative Housing." National Assoc. of Housing Cooperatives.

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