What is a Housing Cooperative?

A housing cooperative is kind of like a housing company . . .

When you live in a housing cooperative, you buy shares in the company, just like when you buy stocks. That means you own part of the company, and if you buy enough shares, you can lease a unit in the co-op. In market-rate co-ops, your shares can appreciate or depreciate in value, meaning you can either gain or lose money on your investment. But limited equity co-ops focus on keeping share prices affordable.

A housing cooperative, aka a co-op, is a type of alternative homeownership structure. Instead of purchasing real property, residents buy shares in the co-op corporation (the company that operates the co-op). When you buy enough shares in the corporation (the amount varies by co-op and unit), you get the right to live in one of the units. But even though you own shares associated with your unit, you never own real property — Co-op shares are considered personal property, like stocks.

Although co-ops are often considered affordable alternatives to renting or owning real estate, that’s not always the case. Each corporation sets its own rules, some of which influence the price of housing. Some co-ops place caps on the price of each share (limited-equity co-ops), for example, while others do not (market-rate co-ops). Co-Op City, a New York City housing cooperative designed for lower-middle-class residents, is a limited-equity co-op. A co-op for wealthier residents would be more likely to use a market-rate structure.

Cooperative real estate is run by the residents, which means that everyone who lives in one gets a say in its rules, bylaws, and operation. Larger co-ops may have an elected board of directors that makes decisions.

Furthermore, housing cooperatives can set membership criteria and screen new residents. Unlike other forms of housing, exclusive co-ops, like Penn South, often have long waiting lists to get a spot.

Although a co-op’s share price (and consequently its value) can appreciate, they are generally not thought of primarily as investment opportunities. Unlike condominiums or houses, many co-ops require shareholders to live in their units. Combined with the fact that many co-ops cap unit values to ensure affordability, this often makes co-ops unsuitable for investment.

Housing cooperatives feature:

• Resident-owned housing: The residents in a cooperative own shares of the corporation that owns the property. This means that co-ops give residents representation in the operation of the co-op. They’re not at the whim of a landlord.
• Affordable: Some housing cooperatives (limited-equity co-ops) cap share prices, which helps to keep costs low.
• Own shares: Residents in a co-op don’t own real property. Instead, they own shares in the housing corporation. These shares are considered personal property. If enough shares are purchased (based on the unit and co-op), the buyer gets rights to the unit associated with those shares.
• No mortgages: When you purchase shares in a co-op, you don’t take out a mortgage. Instead, you take out a share loan.
• Approval process: Although some form of approval is generally required for all housing options, co-ops often have extensive approval processes including interviews and years of tax returns.

Housing cooperatives can be divided into three types:

• Market-rate cooperatives do not restrict the price of shares whatsoever. Shareholders and members can sell their shares and membership at any price they want. These co-ops tend to be more expensive and are more similar to condos.
• Limited-equity cooperatives place restrictions on how much shares can be sold for. These limits are usually set out in the co-op’s bylaws and are there to keep units affordable. Limited-equity cooperatives may also impose income restrictions to ensure the co-op continues to meet the needs of a specific demographic.
• Leasing cooperatives lease (aka rent) the building, units, and any other property from an investor. This means that the cooperative doesn’t have any equity, but may have the ability to purchase the property eventually. Some leasing cooperatives allow residents to take a share of the co-op’s cash reserves when they move out.

When you purchase a unit in a housing cooperative, you’re really buying shares in the cooperative corporation — You’re not buying the unit itself. Those shares count as personal property, not real property.

In contrast, when you buy a unit in a condominium, you’re actually buying real property — You own the condominium unit.

Although there are many similarities between the two, such as resident-determined bylaws and shared facilities, they’re entirely different homeownership structures. Market-rate cooperatives and condominiums are particularly similar, but the way homeowners build equity in their units is the deciding factor.

Residents in co-op housing generally have to pay for two things: their shares and a monthly carrying charge — or maintenance fee.

Buying the shares for your unit is analogous to purchasing a unit in a condo. Although co-op shares are not considered real property, buying enough shares to live in a unit is a substantial cost of the same magnitude as many other housing purchases. However, instead of taking out a mortgage, co-op residents take out share loans. These operate almost like mortgages: The borrower will usually need to make a down payment, and then they’ll make monthly payments to pay off the loan.

In addition to the share loan, cooperative residents also need to pay a monthly maintenance fee. This may cover property and real estate taxes, utilities, blanket mortgage payments (payments for more than one unit), the cost of maintenance, insurance costs, management fees, and reserve fund contributions (a fund used for maintenance and upkeep).

If you sell your shares and move somewhere else, you may also need to pay capital gains tax (depending on how much you earned from the sale and your residency status).

Housing cooperatives offer several advantages:

• Affordable housing: Although not all housing cooperatives are affordable, limited-equity co-ops focus on providing affordable housing to residents.
• A voice in the operations: Cooperatives are collectively owned, which means that all shareholders and residents have a voice in how things are run. For many, this is preferable to having a landlord that has absolute authority over operations and rules.
• Reduced maintenance compared to a house: Since maintenance is shared between residents, the responsibility for each resident may be less than the amount required for a single-family home.
• At-cost housing: Some cooperative housing complexes operate at-cost, which means residents do not pay markups on their units’ maintenance and upkeep.

However, there are some disadvantages:

• Strict approval process: Housing co-ops tend to have more stringent criteria for who can become a resident than other types of housing. The approval process may include interviews and the provision of tax returns. Some co-ops may cap the income of potential residents to help maintain an affordable environment that caters to low-income residents.
• Restrictions on renting: Some co-ops require the shareholder physically reside in their unit. That often means subletting or renting to others is not possible.
• Fewer financing options: Getting a share loan is not as common as getting a mortgage, so there may be fewer loan options available.

As far as real estate investment is concerned, housing cooperatives are generally a poor investment. Many co-ops impose rules that state shareholders must reside in their units. This makes it impossible to rent units out to others.

Furthermore, limited-equity co-ops also impose share price ceilings, so capital appreciation is artificially limited.

To start a housing cooperative, you’ll need to:

• Gather a group of interested members
• Determine the type of coop you’d like to start (limited-equity, leasing, or market-rate)
• Develop a business plan
• Register a cooperative corporation with the government
• Find a property to purchase or lease
• Raise money to finance the property
• Set initial bylaws
• Issue shares for residents to purchase

From there, residents will be able to move in, and the cooperative will begin to take a life of its own as residents make new bylaws and maintain the building.