The Guide to Living in a Co-Op

Here's what you need to know about how a co-op works differently from traditional homeownership.

U.S. News & World Report

The Guide to Living in a Co-Op

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A co-op is a building or community that is owned and controlled by a group of individuals who have equal membership. (Getty Images)

If homeownership sounds like the right next step for you, it’s time to consider the types of ownership that would fit you best. While owning property, be it a plot of land with a house or a condo within a larger building, is the most common form of homeownership in the U.S., you may want to consider buying into a housing cooperative. Especially if you live in a larger city where co-ops are common, it may be a great fit for you.

What Is a Housing Co-Op?

A housing cooperative, or co-op, is a building or community that is owned and controlled by a group of individuals who have equal membership in the group. When you buy into a housing co-op, you purchase shares in the ownership of the entire community, which entitles you to occupy a specific residence.

Here are six things you should know about living in a co-op:

While all co-ops are run by the members in a democratic structure, there are a few different types of co-ops that can change the experience – and the amount of money you spend.

A market-rate co-op is the most common type you’ll see in major cities, where shareholders build equity as the value of the property increases. Shares are bought and sold based on buyer interest and demand, so the price can vary at which a person enters and leaves.

A limited-equity co-op aims to provide an affordable form of homeownership for people who may not be able to purchase a home otherwise. While equity is able to build, the price at which a person can sell shares is limited. This keeps the housing option affordable for future residents.

“In limited equity housing co-ops, the appreciation on a membership interest is tied to something like the consumer price index or a set rate like 10% on initial value,” Jay Cumberland, equal justice works fellow for the Sustainable Economies Law Center, wrote in an email.

A leasing co-op allows residents to make decisions democratically, but residents are considered tenants rather than partial owners of the property. This model often provides an affordable housing option for college students. “If you give all the tenants a vote on next year’s rent, they’ll keep the rent down,” says Daniel Miller, director of properties for North American Students of Cooperation and general manager of NASCO Properties. “Their incentive is to make sure the people who come along next year have an affordable place to live.”

Co-ops are considered democratic organizations, with each member having a vote and a board elected by the members to set up policies and decisions on behalf of the community. The size or purchase price of an individual space does not make any individual shareholder more powerful than another.

“While membership in a worker co-op often ends up being about getting a piece of the pie, being a member of a housing co-op is often about reducing the size of the pie. Housing co-ops are more like consumer co-ops. The consumers govern the co-op with a goal of making the good they consume as cheap as possible,” Cumberland says.

Rather than the deed you receive when you purchase property, you will get a membership certificate and occupancy agreement, explains Randall Pentiuk, an attorney who specializes in housing cooperatives whose firm, Pentiuk, Couvreur & Kobiljak P.C. has law offices in Chicago on Wyandotte, Michigan.

Because you’re not technically buying a piece of property like you would with a condo or house, the type of loan you need to finance your co-op purchase is different from a traditional mortgage – though it will feel very similar to a mortgage.

Unlike with a mortgage, the co-op corporation has the first lien on the property, rather than the lender. In the event of default on the loan, the co-op is owed any overdue money or deferred maintenance first. The co-op is also able to maintain its rules and stipulations for selling the shares to a new buyer, which the lender must follow.

Prior to the closing of a real estate deal with an apartment or home in a co-op community, the board has the ability to decline membership. If the board declines membership, it may choose not to provide an explanation, though common reasons are a low sale price or plans for renovation that don’t line up with the co-op’s stated goals.

“The screening process typically involves examining the applicant’s background as to creditworthiness and criminal history, as well as past problems with living in a community. Recourse is generally only available where there has been discrimination based upon a protected class under the law,” Pentiuk wrote in an email.

Housing cooperatives are prohibited by federal law from discriminating against people based on race, color, religion, national origin, sex, familial status or disability, which is outlined in the Fair Housing Act. Many states and cities further establish local laws against such discrimination, and may extend the protected classes to include sexuality, gender identity or native language, among others.

If people have been denied membership by a board and they believe they have been discriminated against in violation of fair housing rights, they should contact the U.S. Department of Housing and Urban Development to file a complaint at the federal level or reach out to the appropriate housing department for the state or city regarding locally specific law violations.

Depending on where you live, your co-op may prohibit or put restrictions on your ability to rent or sublet your individual living space to tenants while remaining a shareholder of the community. Be sure to check rules and bylaws before having a tenant sign a lease, as additional co-op approval may be required.

While many housing co-ops look like a standard apartment building, you may find differences between a landlord-owned apartment building or condo and a co-op.

Particularly for leasing co-ops, you may find options that operate more as a co-living option in a large house rather than separate homes, including shared bathrooms, kitchens and living spaces. “Some are set up as an apartment co-op or dorm with en suite bathrooms; others are a large group rooming house,” Miller says.

Even in apartment-style co-ops, you may find the amenities are customized to the tastes of the community. Depending on the group of shareholders, you may see a focus on pet-friendly options versus entertainment, for example.

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