You know you want to purchase a home, but you have not decided on the type. You have many options including single-family homes, townhouses, PUDS, condos, and co-ops. Many people know of the first four choices, but cooperative housing projects are not as widely known, unless you live in Florida or New York City. This type of purchase can be lucrative for the right person. Experts typically recommend that first-time homebuyers avoid them because of the complexity of the process, though.
What is a Co-Op?
Let’s start by looking at how a co-op works. For all intents and purposes, just looking at one would probably make you think of a condominium. They typically have the same structure. You see a large building with individual units with various owners. What differs, however, is the ownership. If you were to purchase a condo, you purchase your unit and you “own” it, or as much of the equity you have in the home. As you pay your mortgage down, you continually own more of the unit. With a cooperative housing project, you don’t own any part of the unit. Instead, a corporation owns it. What you own are shares in the company who owns the project. The shares you own provide you with the leasehold on the property.
What Do You Pay?
Unlike a condo, you don’t pay a mortgage with a co-op. You buy your shares, which you need to secure financing to purchase, in most cases. On a monthly basis, you then pay what they call maintenance fees. You pay these on a monthly basis, much as you would a mortgage, but the fees go to the corporation who owns the project. The corporation uses these fees to pay:
- The mortgage on the property
- The real estate taxes on the property
- Utilities, such as heating and gas
- Salaries of employees who keep the property maintained
- Maintenance costs
The money you pay to your bank pays your loan down. Remember, however, this is not a mortgage with the standard tax benefits a mortgage provides. The owner of the project handles the actual mortgage payments for the entire unit. The monthly maintenance fees you pay are tax-deductible, in most cases, though.
How to Buy a Co-Op
Another way purchasing a co-op is different is the way you are “accepted” into the project. With a condo, it is typically between you and the seller. The condo’s board does not determine if you are “good enough” for the project. With a cooperative housing project, though, the board has a direct say in whether you will live there or not. In fact, the board will conduct a thorough interview with you. This interview may also include a background check, evaluation of your finances, and a verification of your current and past employment. The board can approve or deny you as a resident of their project.
Generally, the people who purchase into a co-op are those who have the same interests or desires for their community. In other words, they have some commonalities that draw them together and make it natural to live within the same project. Condos, on the other hand, are available for anyone to purchase. The owners of the individual units are usually more interested in their investment in the property than the community around them. This doesn’t mean they don’t care about the community, but their real estate investment is important to them.
Selling the Property
A problem many people have with co-ops is the difficulty with exiting them. Many projects have a specific period you must live in the project. If you try to exit before this time, you may have to pay a serious fine as a result. The minimum time you must live in the home is usually around 2 years, but each project differs. In addition, you cannot rent the space out if you decide to move before your time is up. With a condo, you may be able to rent your unit out as long as your financing allows it.
Securing financing for a co-op differs from that of a condo. In fact, it is usually more difficult to secure. You are not purchasing a property and receiving a deed in exchange for the purchase. Instead, you purchase shares in the company who owns the project. It is this company who holds the mortgage. Many banks have pulled back from financing cooperative housing projects after the housing crisis. Finding a lender may prove to be difficult, especially if you are a first-time homebuyer. You don’t have anything to guarantee the bank should you default. With a condo, your unit is your collateral. If you don’t pay your mortgage, the bank takes your property.
As a first-time homebuyer, your money is better invested in a condominium. This way you can do what you want with the property and even sell it down the road. Even if there are profits to be made in a co-op, it is not a secure investment for someone who has never owned a home in their life before. It is best to get some experience in the mortgage industry, making mortgage payments, and reaping the benefits of owning real estate first. You also receive more tax benefits as a result of owning a condo rather than a cooperative unit. Once you have some experience under your belt and you know that a cooperative housing project is right for you, and then you can go for it. Until then, show lenders that you are a responsible financial citizen by securing a mortgage and paying it on time.