What Is a Co-Op and How Do They Work?

December 11, 2023 - 5 min read

Traditional home buyers become owners of the physical real estate they’ve purchased. But this isn’t the only route to homeownership. By purchasing into a co-op, you become a shareholder in a co-op property – typically an apartment complex or building with attached residences within a large metro area.

Take the time to learn more about how co-ops work, exploring various types, their pros and cons, and familiarizing yourself with the financial aspects of buying into a cooperative.

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What is a co-op in real estate?

A co-op, also known as a cooperative, is a different form of homeownership that’s popular in bigger metropolitan areas like New York City. With a co-op, unlike buying a single-family residence where you own the entire property, you own shares of stock in a cooperative corporation that you can later sell. That corporation legally owns the structure – such as an apartment building – where you will live.

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You are not purchasing real property when you buy into a co-op. The shares you buy give you proprietary rights to a specific unit within that building, and the number of shares you own typically corresponds to the location and size of your unit.

“Each unit within the building is allocated a specific number of shares. When you purchase a home within that co-op, you are given shares of stock, not a deed,” explains Adie Kriegstein, founder of the NYC Experience at Compass in New York City.

In a condominium, like a single-family home, you own the specific unit you purchase (fee simple ownership). With a co-op, ownership of the shares in the cooperative corporation gives you the right to occupy a particular unit within the building. That right to occupy is often memorialized in the form of a lease, called a “proprietary lease” or “occupancy agreement.”

The co-op operates under the management of a board elected by the shareholders, who possess the right to vote on rules, policies, and any proposed changes to them. In many co-ops, the board has the authority to approve prospective buyers of a unit. That’s different from condominiums, where the board usually only has a right of first refusal to acquire a unit. This means the board purchases the apartment from the seller at the contracted price or waives that right to purchase, and the buyer and seller may complete the sale. The board calculates the revenue needed to properly operate, maintain, and repair the building, which comes from monthly maintenance fees charged to every shareholder.

Not all co-ops are apartment buildings. A group of townhomes, duplexes, row houses, and even single-family homes can be cooperatives, too.

“In New York City, most co-ops are larger apartment complexes, but there are many small multi-family dwellings that are also co-ops,” adds Kriegstein.

Different types of co-ops

There are a handful of different co-op categories, each of which operates a bit differently:

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  1. Market rate co-op. This type permits members to purchase and sell shares at prevailing market rates and allows the opportunity for profit as the market appreciates. “A market rate co-op has the fewest restrictions on transfer and is ideal for people who view their shares as an investment,” says Adam Hecht, a real estate attorney and principal at Hecht Schondorf LLC.
  2. Leasing co-op. Here, the corporation doesn’t own the property but leases the entire building from an outside investor/owner. Occupants are leasing tenants instead of shareholders.
  3. Limited equity co-op. This works similarly to a market rate co-op, except the corporation controls the price of the shares within the co-op – thus limiting the price at which shares can be purchased or sold. “I would compare this to rent control or rent stabilization because they control the price. The goal here is to keep the co-op affordable,” adds Hecht.
  4. Zero-equity co-op. As with a limited equity co-op, the price of shares is tightly controlled. “With a zero equity co-op, the rules don’t allow shareholders to sell their shares for more than what they paid, a structure that aims to keep housing affordable,” Hecht continues.

Co-op pros and cons

One of the most significant benefits of purchasing and living within a co-op is a lower relative price compared to purchasing a comparably sized condo, including lower closing costs.

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“In some areas, a portion of the monthly maintenance fees can be tax-deductible, too. And shareholders tend to know and care more about their neighbors within a co-op building,” says Christina Forbes, president of the Manhattan condo/co-op division of FirstService Residential.

What’s more, you may find it easier to locate available co-op housing than condos for sale in big cities and competitive metro markets.

A plus and a minus is that co-op boards commonly set stricter policies and rules. The application and approval process is stringent. But if you pass muster and become a shareholder/tenant, you’ll likely enjoy the peace of mind knowing that your neighbors are financially stable and respectful of the rules. And even if a neighbor defaults on their co-op financing or goes into foreclosure, it won’t affect the entire building.

“The co-op board approval process is generally longer than in a condo and includes a more in-depth interview with the board,” Forbes adds. “In many jurisdictions, a co-op board can approve or deny an applicant for any reason, aside from discrimination.”

Also, a co-op board often has more power to regulate what shareholders can do with their units than a condo board. So, there may be stricter rules about things like pets, subletting, and decorating.

Furthermore, trying to sell your co-op shares can take longer than expected and be trickier than selling real property. Note, too, that the co-op board can reject your potential buyer.

Another drawback? Obtaining financing for a co-op can be more challenging (more on this next), and you may be required to make a higher down payment on a co-op (typically between 10% and 20%). In some instances, the board of the cooperative will set the amount of the down payment. And some luxury co-ops require paying all cash.

Do co-ops need special financing?

When you need to finance the purchase of a single-family home, condo, townhome, multifamily unit, or other form of real property, you can apply for and obtain a mortgage loan. But you usually cannot finance a co-op with a mortgage loan. Special financing is needed for this purchase as you’re acquiring shares in the corporation (not the actual unit) that owns the building.

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Instead, most prospective co-op purchasers need to pursue a special co-op loan, also known as a “share loan.”

“These loans are considered personal property loans, not real property loans, and are generally harder to obtain due to the additional legal and financial complications of co-op ownership,” cautions Min Hwan Ahn, an attorney in Philadelphia.

When you apply for a share loan, you’ll need to provide the lender with details on the co-op operation and building. Your lender will vet the co-op board of directors, the co-op’s financial stability, and your finances to determine if you qualify for financing. Put another way, both you and the building will need to be approved for financing.

“The lender will carefully assess the building’s financials, recent sales, price per share, and the ratio of owner-occupied units versus sublets,” says Forbes.

Keep in mind that the security/collateral for the loan to buy a co-op is the shares in the co-op corporation – usually in the form of a lien on the shares themselves. “Because of this, co-ops can be harder to finance and require a larger down payment with higher underwriting standards for the borrower, including a lower maximum debt-to-income ratio allowed,” Hecht points out.

The bottom line

Purchasing and living in a co-op may sound complicated, but once you get past the board approval and financing process, you’ll probably find that overall housing costs are less expensive than living in a condo or other attached/multifamily structure.

Hunt for the best co-op bargains, shop among several different co-op lenders, and enlist a team of experts to guide you along your journey, including an experienced Realtor/agent and real estate attorney.

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Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.
Aleksandra Kadzielawski
Reviewed By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).