What Is a Co-op and Is it Right for You?

Condo building at 999 N. Lake Shore Drive in Chicago

A co-op (or coop, short for cooperative) is a type of housing owned or leased by a corporation. The shareholders of the corporation have an exclusive right to live in a specific unit in the building.

A co-op unit can be any of the following:

Apartment
Townhouse
Single-family home in a community development
Mobile or manufactured home* in a community development

In mobile home park cooperatives, the co-op corporation usually owns the land, utilities and community facilities, and each shareholder owns their own mobile or manufactured home.

>> JUMP: 7 questions you should ask before buying a co-op

Where are co-ops popular?

Co-ops are common in Chicago, New York City, and Washington, DC.

Co-ops are generally located in larger cities — particularly where housing can be expensive because co-ops tend to cost less per square foot than condominiums or single-family homes.

How a co-op works

Management | Maintenance fees | Equity

A corporation owns the title to a piece of real estate, and a co-op buyer owns shares of that corporation. A co-op buyer does NOT directly own real estate.

The corporation has shareholders, some of whom sit on its board of directors. The number of shares an occupant owns is proportional to the size and “desirability” of the unit. A corner unit, a location on a high floor, or a lake view, for instance, may have more value than “less desirable” units.

The right of a shareholder to occupy a co-op unit is established through an occupancy agreement or proprietary lease.

Management structure of co-ops

Typically, shareholders (occupants) elect members of a co-op’s board of directors. If the board has the budget, it may hire a manager or management company to handle finances and business operations under the board’s direction. The board of directors establishes rules and bylaws for the co-op community to obey.

Shareholders have a vote in the corporation’s affairs. For most market-rate co-ops, the number of votes a shareholder can cast depends on how many shares they hold. In some arrangements, an individual shareholder has one vote in decision-making, regardless of the number of shares they own.

Co-op board jurisdiction

The co-op board has the power to decide who can purchase shares and move into a co-op unit. But because of fair housing laws, the board can only reject someone based on finances or concerns about that person’s willingness or ability to obey the co-op’s rules and bylaws.

Finances. The co-op board wants buyers who can afford to join and be relied on to pay their debts.

If an individual occupant doesn’t pay their share of the monthly maintenance fee, mortgage, or taxes, the other occupant shareholders — as co-owners of the co-op building — are held responsible. The entire building could be at risk of foreclosure!

Willingness and ability to obey rules. Co-op boards, with the input of shareholders, create rules and bylaws everyone is expected to follow. These often include restrictions on:

Pets
Renovating your unit
Subletting your unit
Who you can sell your unit shares to

The board wants to be sure the person moving in won’t disrupt the co-op community’s lifestyle. In turn, YOU should review the rules and bylaws closely before purchasing to be sure the lifestyle your co-op neighbors want to maintain will be a good fit for you.

Co-op maintenance fees

Co-op members pay a monthly maintenance fee (sometimes called a carrying charge) to cover their portion of the building’s operating and maintenance expenses. These expenses are billed at cost, so there’s no markup for the items and services covered in the maintenance fee.

Maintenance fees can increase yearly based on the rate of inflation.

Maintenance fees cover:

Building amenities (a fitness center, pool, etc.)
Contributions to the reserve fund — a savings account managed by a co-op, condominium or business, for anticipated and emergency future financial expenses
Insurance premiums
Maintenance and upkeep
Mortgage payments (if one still exists for the building)
Professional management fees
Property taxes
Salaries for support staff (doorman, building superintendent, etc.)
Special assessments — one-time fees that may be collected when the board hasn’t collected enough in its reserve fund
Utilities (heat and water, if included)

Are maintenance fees tax deductible?

Each shareholder’s portion of the monthly maintenance fee that covers property taxes is tax deductible. Other maintenance costs may be as well. Ask your tax adviser to be sure.

Economic structure of co-ops

A co-op’s structure affects the type of equity* a buyer can earn while owning co-op shares.

Market-rate co-ops

These co-ops earn equity the way a single-family home or condo would. As the property’s value rises, the co-op shareholder can realize that extra value when they sell their shares. Owners can sell their shares whenever they want, and at whatever rate the market allows.

Limited-equity co-ops

Shareholders in limited-equity co-ops agree to resell their shares at a predetermined price, restricting the amount of profit they can make from the sale. This structure can keep monthly costs low, so it may have benefits for low-income families.

Leasing or zero-equity co-ops

When a co-op leases its building rather than owning it, the cooperative doesn’t build equity. It’s similar to a tenant-landlord situation. But some leasing co-ops let members who leave the co-op take some portion of their share of the cash reserves collected by the co-op corporation while they were shareholders.

» READ: How to Start Investing in Real Estate (Must-See Hacks)

Co-ops vs. condos

Knowing the nuances between co-ops and condominiums (condos) can help you make a better decision on what housing option is best for you financially and your lifestyle.

Similarities

Co-ops and condos are both housing structures made of multiple units that share common areas and amenities, and the maintenance cost of those areas. Special assessments are required from time to time to cover large expenses that affect the common areas, like landscaping upgrades or a new roof.

Expenses within individual co-op and condo units are the buyer’s responsibility. Personal property insurance is required for the unit and the occupant’s belongings.

Co-ops and condos both have a board or association management that creates the residential rules and bylaws.

Both co-op and condo owners (unless it’s a leased co-op) benefit from the loan interest tax deduction and other deductions most single-family homeowners benefit from.

Differences

Co-op owners own corporate shares. Condo owners own a property deed.

In a co-op, the building pays real estate taxes and mortgage interest, if applicable, and the shareholders’ portion is rolled into their monthly maintenance fee. Co-op owners can sometimes deduct a portion of their non-tax-and-interest-related maintenance fees as well. Meanwhile, individual condo owners pay property taxes and interest up front.

Co-op owners also have less control over what they can do with their units without board approval. The co-op board must approve:

Who shares can be sold to
Renovations (the co-op owns the inside of your unit as well!)
Subletting (it may be forbidden or restricted)

If a co-op shareholder forecloses on their loan, the entire co-op can be penalized. Each owner could have a lien* placed on their property and would be unable to sell their shares until their debt is cleared. If a condo owner defaults on their mortgage or monthly assessments, they’re risking just their own unit.

Pros and cons of owning a co-op

Topic	Condo	Co-op
Cost	Generally more expensive than a co-op, but depends on location	Generally less expensive than a condo, but depends on location
Down payment	3–20%	Generally 10–20% (can be higher in places like New York City)
Financing	Less challenging than co-op financing. Most lenders are familiar with condo loan financing.	Can be challenging. Fewer lenders are familiar with how to handle co-op financing.
Foreclosures	One owner's individual foreclosure doesn't affect anyone else in the condo building.	A lien on an individual's unit puts liability on the entire building. All shareholders are affected.
Monthly fees	May not cover utilities and taxes, so tends to be less	May get pricey if fees include garage parking and other amenities
Ownership	Own real property and have a deed of ownership	Own shares of a corporation, and have a right to occupy a unit associated with those shares — no deed of ownership
Renovations	Require no approvals (unless you plan to tear down a wall)	Require board approval
Rules and regulations	Condo owners can attend meetings and voice their opinion. You can vote for board members, but the board makes the final decisions.	As a shareholder, you have a say in how the building or complex is run, even if you're not on the board
Subletting	Free to sublet, but may have restrictions on what percentage of the building must remain owner occupied	Subject to board approval, but often discouraged or not allowed
Security	No control over who moves into the building or who your neighbors might be, possibly high turnover of owners and renters	More stringent move-in requirements, control over your social environment, stability
Tax benefit	Monthly assessment fees are NOT tax deductible	Portion of maintenance fees MAY be tax deductible

Buying a co-op

If you’re looking to buy a co-op in a large city where co-ops are popular, search on general home search sites like Zillow and Redfin to see what’s available.

If you live somewhere else, search the National Association of Housing Cooperatives (NAHC) database or call one of NAHC’s regional member associations to find out what’s available near you.

If you’re looking for a limited equity co-op, the Urban Homesteading Assistance Board (UHAB) lists available co-ops and resources.

Any co-op buyer would be wise to work with a real estate agent who has experience buying co-ops. An agent may be familiar with co-ops in your area, know their history, and be able to provide information you may not have access to otherwise.

A realtor with previous co-op experience can also recommend a lender or attorney (if required) who’s familiar with co-ops, which will help if any financing or tricky legal issues arise. This real estate professional may also be able to prep you with questions to answer — and questions to ask — when facing the co-op board for its approval.

7 questions you should ask before buying a co-op

The questions you most want answered before committing to buy a co-op have to do with its financial health and the rules you’ll be expected to live by as a member.

How much are the co-op’s monthly maintenance fees?

Monthly co-op maintenance fees must be paid on top of your loan repayment. This fee will likely increase over time because of inflation.

In some cases, maintenance fees are so expensive that the listing price of the unit is reduced to offset those costs. Your monthly maintenance fee could end up costing more than your mortgage payment.

Be honest with yourself about whether you can afford both the monthly loan and maintenance payments.

Fees in older buildings in less-popular urban areas could be as low as $350, while a penthouse unit downtown could be more than five figures.

What do the co-op maintenance fees cover?

Monthly maintenance fees typically cover:

Amenities
Building maintenance
Building mortgage
Property taxes
Staff salaries
Utilities (water, heat, etc.)

Before buying, ask to see a list of what the monthly maintenance fees cover. This can also help you compare itemized costs to other co-ops you might be considering.

How much is the co-op’s underlying mortgage?

If there’s an underlying mortgage, you’ll want to know how much of the monthly carrying charge goes toward repaying it. This tells you how much your monthly fee should go down once that mortgage is paid off.

The good news is you can deduct property tax and interest on these payments when you file your taxes, and once that underlying mortgage is paid off, your monthly fees will decrease.

But you may still pay a mortgage after your share loan* is repaid. This could happen if you have a 15-year fixed share loan and the co-op building has more than 15 years left on its mortgage, or if the building mortgage is refinanced as you are coming to the end of your share loan term.

Are any special assessments planned for the co-op?

You’ll want to know if a roof replacement or other big expense is coming up to see if you can afford that in your budget. If so, ask if you’ll need to pay it in a lump sum or in installments.

Can I sublet my co-op unit?

Co-op boards tend to have a lot of restrictions on sublets, so find out under what circumstances they’re allowed. If allowed, the board will have to approve your tenant, so you’ll want to allow time for that process.

Are pets allowed?

If you have a fur baby, you’ll want to know this!

Can I make renovations to the unit?

Understand exactly what changes you’re allowed to make, and what process to follow to get them approved by the board.

Financing: The loan process for buying into a co-op

You’re not requesting a mortgage, per se, when you apply to finance a co-op. You’re applying for a share loan —borrowing funds to buy shares in the co-op corporation.

It can be hard to find a lender who’ll issue a share loan, as it’s not a very common need. Some co-ops have relationships with certain lenders to make the process simpler.

Just like a traditional mortgage, your lender will evaluate your credit score, debt-to-income ratio (DTI)*, and cash assets to determine your qualifications for the loan. Most co-op lenders require a down payment of 10–20%.

A lender will also want to examine the financials of the co-op and how it’s run. They’ll want to determine if any potential major expenses are anticipated, and if there’s enough money in the co-op’s reserves to pay for the unexpected.

» MORE: 26 Top Real Estate Questions for Buyers and Sellers: What To Know

Co-op defaults are rare, but if the co-op building does default, all occupants are affected. Occupants can be evicted, or if a new owner buys the building, they may become tenants paying rent to a landlord.

Bottom line

Co-ops are a unique form of home ownership, and they’re significantly different from condos.

Co-ops are typically less expensive per square foot to purchase than a condo, in part because co-ops are less common and in many places less in demand than other forms of home ownership.

A co-op is probably not a good option for investors who want to:

Build equity
Rent to tenants, since rentals might not be allowed at all — co-ops tend to prefer occupation by owners to reduce turnover and disruption

Because there’s not as much turnover, co-ops allow you to get to know your neighbors over the long term — or even have a hand in choosing them. You’ll likely feel more secure knowing who they are, and you’ll have a chance to build a sense of community based on common lifestyle and goals as outlined by the co-op’s rules and bylaws.

» JUMP: Pros and cons

FAQs about what is a co-op

What does it mean to live in a co-op?

You’re living in a type of housing that’s owned by a corporation, in which shareholders have an exclusive right to live in a specific unit.

What are the disadvantages of owning a co-op?

Most co-ops require a hefty down payment, often 10–20% and sometimes more.

The rules for subletting your co-op can be quite restrictive, if allowed at all. So they’re not a good option if you’re planning to move in the near future or are purchasing to rent.

Few lenders provide co-op loans, so opportunities to shop for great terms or rates are limited.

You’re financially linked to your neighbors. If they default on their financial obligations to the co-op, the building could default and you’d be on the hook.

Are co-ops a good investment?

Co-ops are generally not good investments. You likely won’t earn much equity and find it hard to rent them to tenants. You’ll also have restrictions on making renovations and updates.