How to Buy a Co-op

Are you interested in buying a home in a housing co-operative, more usually called a co-op? Roughly 1.2 million American households live in these, so purchasing one needn't be hard.

You're Not Buying a Home!

The first thing to get your head around with co-ops is that you're not buying a building, or even a bit of a building: You're buying stock (or shares) in a business.

True, those shares come with a right to occupy a unit within a building owned by the co-op, but the home you "buy" remains the property of the corporation in which you own shares. This means you won't be able remodel or make changes to your unit without permission, and it can also have implications when you come to sell or need to rent out the property. Absent any exceptional factors, the value of your co-op business (and so of the shares you own in it) is likely to track closely the rise and fall of the wider housing market in your area.

Financing a Co-op Purchase

Because you're not buying a home, you won't be applying for a mortgage. Instead, you're going -- unless you already have the full purchase price -- to need a co-op share loan. Not to worry, these are very similar to ordinary home loans, and are widely available through mainstream mortgage lenders. Fannie Mae and Freddie Mac both buy and back these loans, and the Federal Housing Administration insures them.

Although there are differences between the rules governing these share loans and the ones that apply to ordinary mortgages, these are in practical terms usually small. Indeed, there’s a good chance you'll hardly notice them.

A Financial Hurdle

There is, however, one financial hurdle you may have to clear when buying a co-op that doesn't apply to other home purchases.  This is far from universal, but it's also not uncommon. It concerns your personal wealth and creditworthiness. And to jump this barrier, you might even have to make a significant cash deposit into an escrow account.

Because co-op corporations are private businesses, they can impose almost any rule their boards of directors (elected by shareholders) like.  The co-op board in which you want to buy shares is almost certain to demand full financial disclosure from you, including at least your last two tax returns, before it accepts your application. It could also carry out a credit check, and is highly likely to require you to attend an interview.

If it decides that the risk of your failing to pay your monthly fees is too high, it may turn you down. It might do the same if it's concerned about your ability to find the money to meet any special assessments it levies in the future to fund repairs or improvements.  This is where that escrow account might help.  The board members who review your application and interview you may be prepared to ignore such issues if you pay upfront one, two or three years' fees into such an account.

This interest in your personal finances makes co-ops unique in the homeownership market. With all other types of purchase, you only have to satisfy your lender that you're good for your mortgage payments.

Practical Hurdles

Even if you clear the financial hurdle, you may still not finish the race. Some co-op boards regard their buildings as exclusive clubs, and can exclude you if they think you're the "wrong" sort of person. Of course, they're legally barred from discriminating on some grounds, but they're perfectly entitled to turn you down if they don't like the way you dress, speak, vote -- or do pretty much anything else. Some giddily upmarket New York City co-ops refuse celebrities, because they're worried about paparazzi and parties disrupting their other residents' peace.

This choosiness can have an effect when you sell: You don't just have to find a buyer who satisfies a lender's requirements: he or she has also to meet the co-op board's standards.  And they're not always financial or social: Sometimes boards prevent or restrict residents renting out their homes or using them as anything other than a main residence (so not a vacation place, say, or a therapist's office), both of which can put off potential buyers.  All these factors together can extend the time it takes to sell a home, sometimes by months, and occasionally by years.

Benefits of Co-ops

And yet co-ops remain popular among many homeowners  -- for a number of good reasons:

  1. Depending of the building and the local housing market, they're often cheaper than equivalent condos.
  2. As a shareholder, you have a say in the monthly fees and special assessments you pay.
  3. Many (hopefully all) the restrictions imposed by your board can work for you as a resident.  Your neighbors could be evicted if they persistently breach noise, home-based business or rules against antisocial behavior.
  4. As fellow shareholders, you may well strike up friendships with other residents -- who have, after all, been preselected to be at least a bit like you -- more quickly than you would if you were living in a condo, townhouse or other sort of home.
  5. You should be allowed to study the co-op's rules (a.k.a. "bylaws") before you make any commitment. This, together with your interview, gives you a chance to see if you're going to fit in with the building's ethos, and are going to be happy with the lifestyle allowed.
  6. You should at the same time be given access to the board's financial reports and statements. It's important you read these carefully so you can be sure the company you're buying into is sound and well managed.

Co-ops don't suit everyone. But you can see their enduring appeal to many.

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