Cooperative buildings, or “co-ops,” are a unique housing option, typically found in a limited number of U.S. urban markets. Co-ops first appeared in New York City in the late-1800s and became popular in Washington, DC in the 1920s. Today, co-ops are also prevalent in Chicago.  

A co-op is a multi-unit property owned by a company, usually a Limited-Liability Company (LLC). Individuals who purchase a unit in the building become shareholders in the holding company, with an exclusive leasehold on their particular unit. 

That means your purchase is financed with a home loan instead of a residential mortgage since you’re buying shares in a company instead of real property. 

The property is managed by a co-op board comprised of a limited number of shareholders in the building, who make decisions for the benefit of the corporation (other residents). Legally, it’s a different arrangement from a condominium, in which case each unit has a different owner.

In a co-op, the corporation usually assumes maintenance responsibilities that fall outside individuals’ units, including property management and maintenance staff, mowing and snow removal, insurance, taxes, mortgage (if any), repairs, and major systems like HVAC, electric, and plumbing. 

The co-op board also gets involved in all purchases and sales, reviewing and approving any new applicants.

Advantages

• In some cases, co-ops offer a less expensive housing option. They are usually cheaper, per square foot than condos in the same area, with the added benefit of lower closing costs.
• A future sale of a unit can result in significant financial gains, even though owners aren’t building equity. This is especially true for a long-term investment in a high-cost housing market.
• Co-ops often provide more social “connectivity” than large condo buildings, which can be helpful in big cities, where it’s harder to get to know your neighbors. 

Disadvantages

• Even though you can ignore property management chores outside your unit, you’ll still have to pay your portion of these expenses, which may be substantial. 
• At tax time, co-op owners face very different financial circumstances from mortgage-holding homeowners, who may enjoy preferable tax deductions. 
• If the board approves major a project or new amenities, you may receive a substantial assessment bill for your portion of the cost.

Depending on the co-op

• The co-op board may need to approve any new resident, including a roommate moving into your unit. 
• Renovations to your unit may also require board approval, potentially involving an application fee and a lengthy approval process. 
• You may not be able to rent out your unit on a short-term basis if, for example, you need to relocate for a year, due to work.
• Even if you are allowed to rent your unit, many co-ops only allow a limited percentage of the building to be sublet and may require a minimum residency (typically one to three years) before you are eligible to apply for approval.
• The co-op may control the stability of the building by discouraging frequent sales, potentially including a “flip-tax” to be paid by anyone who sells shortly after buying (usually within the first one to two years of ownership).

Regarding the approval of new residents, co-ops must adhere to the Fair Housing Act, which prohibits housing discrimination on the basis of race, color, national origin, religion, sex, familial status, and disability. These are federally protected classes. 

Individual states may have laws protecting additional classes based on age, creed, sexual orientation, marital status, weight, height and source of income.

If you are interested in learning more about co-op options in your market, contact an Accredited Buyer’s Representative, who can assist you in exploring all housing alternatives in your area.