How Housing Cooperatives Work

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.)

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.