Mortgage Advice & Articles

Housing co-ops

Formal housing cooperatives, or co-ops, have become a vital component of urban housing in the U.S., particularly since the 1960s. Today, more than 1.5 million American families live in co-ops ranging from low-income apartment buildings to luxury town homes to entire housing communities. When you buy into a housing co-op, you buy much more than four walls and a roof -- you buy into a way of living and a ready-made neighborhood.

In fact, you don’t actually buy the four walls and roof of a co-op home. What distinguishes buying a co-op from purchasing other forms of real estate is that you are buying shares or membership in a cooperative housing corporation. It is the corporation that owns or rents the real estate. Unlike standard rental housing, however, your monthly share loan payments help you accumulate equity in your co-op share. And, generally speaking, buying a co-op share is more affordable than buying real estate, which makes it an attractive choice for those with limited resources.

Getting a share loan
Share loans are available through banks and credit unions in much the same manner as standard mortgages. They are also known as co-op mortgages, co-op apartment loans, or end-unit financing, depending on where you live. In order to qualify for a share loan, lenders typically expect you to make a down payment of five to 10 percent of the purchase price. Like a mortgage, the loan is then amortized over a period of years, and each month you pay back the loan with interest.

Are there other fees?
Closing fees are lower for share loans than they are for mortgages. The sale is treated as the transfer of personal property (the stock certificate or cooperative ownership contract) rather than the transfer of land, so land transfer taxes do not apply. You should expect to pay additional monthly fees, however, for maintenance, similar to the way condominiums charge monthly fees. The fees vary according to the co-op, and may also include insurance premiums, utilities and real estate taxes. The good news is that even though you aren’t paying the real estate taxes directly, you can usually still deduct your share of the tax payments and mortgage interest on your personal income tax return. (Consult a tax advisor about your situation.)

There are three types of housing co-ops, each with slightly different characteristics:

  • Market-rate housing cooperatives: Buying into this type of housing co-op is the most similar to buying a condominium or single-family home. The share price is determined by fair market value. Accordingly, this type of co-op has the potential to allow you to build up the most equity.
  • Limited-equity housing cooperatives: In a limited-equity housing co-op, there are restrictions on the amount sellers can get for their shares when they leave the co-op. The co-op housing corporation places these limits in order to ensure the housing remains more affordable. Members benefit by receiving below-market interest rates on loans, breaks on real estate taxes and other cost-saving measures. The co-op bylaws may also set a maximum income limit for new members as a method of ensuring the housing is accessible to families in need.
  • Leasing (or zero-equity) cooperatives: In the case of a leasing co-op, the co-op housing corporation doesn’t actually own any real estate, but rather, leases it from an outside investor. As a result, it doesn’t build up any equity. In some case, if the property eventually comes up for sale, however, the corporation may buy the property from the investor and convert the co-op into one of the other two types of cooperatives.


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