How to Buy a Co-Op
5 steps to owning a cooperative housing residenceWant homeownership without the responsibility of mowing the lawn or fixing the roof? Owning a cooperative, or co-op for short, may be for you.
According to The National Cooperative Business Association, there are more than 1 million units of cooperative housing scattered throughout the United States, with large numbers located in major urban areas like New York City, Chicago and Washington, D.C. But buying and owning a co-op is much different than buying a condominium or single-family home, so it’s important to understand the differences before deciding if this type of living is for you.
- Step 1: Understand Co-Op Living
- Step 2: Partner With an Experienced Co-Op Agent
- Step 3: Read the Building Bylaws and Financials
- Step 4: Compile Your Financials
- Step 5: Meet the Co-Op Board
When you own a single-family home, you're responsible for taking care of the home and the property.
When you own a condominium, you're responsible for everything inside your home, but you pay association dues that are used to maintain the property.
In a cooperative, you must first be approved by the building’s board of directors before you can own your home. Then, it’s a corporation that is the legal owner of the building and you, the tenant, are a stockholder. You pay a lender for the mortgage, but you are also required to pay a monthly fee to the corporation so they, in turn, can pay their building mortgage payment, property taxes, property manager and maintenance charges.
“All things being equal, condos have a truer form of ownership compared to co-ops, but they are perfect for starting out or downsizing because they tend to be cheaper and are good for someone who travels a lot and doesn’t like exterior home maintenance,” says Ilona Bray, co-author of Nolo's Essential Guide to Buying Your First Home.
Every co-op building has rules that residents must abide by called bylaws. These dictate your building’s dos and don’ts and vary from building to building. Similar to rules set by a condo's homeowners association, the bylaws are meant to protect residents' common interests, but they can feel restrictive to some. For example, some buildings do not allow pets, while others go as far as limiting how long visitors can stay overnight. You'll need the co-op board's approval before you do any remodeling to your unit, and most co-ops prohibit owners from renting out their homes.
Co-op living isn't for everyone. Weigh the pros and cons. In the high-priced market of New York City, co-ops are the easiest way to break into homeownership and offer strong appreciation rates. But if you're not willing to sacrifice certain freedoms, you may be better off renting in a less-restrictive building.
If you’re convinced that this form of living is for you, partner with a real estate agent who is experienced in handling co-op transactions. These agents are familiar with the financial requirements of each co-op building and can steer you to where they know you will be approved.
Getting through the approval process is the toughest part of buying a co-op. Make sure you hire a team of experts who can help you build a strong case. You'll want an accountant, who may assist you in providing additional financial documentation, and an attorney, who can answer any legal questions you may have, on your team.
Once you find a unit you like, you will be given time to read the cooperative’s documents, including their bylaws and financials. How much time depends on your state’s laws, but can range from a few days, which is more common, to a few weeks. You want to make certain that the bylaws are something you can abide by and that the building is financially healthy.
When you examine the budget, see if the association sets aside a sufficient amount of money in a reserve for unexpected repairs and expenses. If not, this is a serious red flag. Your monthly maintenance charges may be raised or additional monies may be required (called an assessment) to pay for such repairs once you move in.
After confirming that the building is financially healthy, the board will want proof that you are financially healthy and can afford to pay your monthly maintenance fees. Although you’ll provide your lender with financials proving that you can afford to buy the co-op, the board can ask for copies of your tax returns, credit reports, investment income, income statements, pay stubs, letters from accounts, net worth statements and more.
Why? It’s up to the building’s board or management team to make sure that you have enough financial resources to not only make the purchase, but also to pay your maintenance fees and taxes. Fluctuating incomes and excessive debt are red flags that could prevent acceptance, even if your lender says yes.
“Essentially this is the real difference between co-ops and condos,” says Robert Sheridan, principal and CEO of Robert Sheridan & Partners in River Forest, Ill.
When you buy a single-family home or condo, you don't need approval from the previous owner or the neighbors. However, when you purchase a co-op, the board of directors must approve of you financially and personally. In other words, they must like you. Although a board cannot discriminate against you, they do not have to give a reason for their rejection.
For that reason, the approval process can be stressful and nerve-wracking. Even if you really love the unit and have a strong financial portfolio, the board has final say on whether you can own it. Especially in New York City, where co-ops in the best neighborhoods have long waiting lists, boards have strict requirements, including thorough background checks and proof that your annual income is at least 50 times your monthly mortgage and expenses.
If you're one of the lucky ones, the board will approve your application and welcome you to the building. You're on your way to enjoying your new home.