Co-ops explained: Everything you need to know

A co-op (short for housing cooperative) is a shared housing arrangement in which individuals buy into a building as shareholders, rather than as owners of a particular unit. This shared responsibility for the whole building allows co-op owners to pay less upfront per square foot than for other types of housing. Today, co-ops make up about 65% of NYC’s owner-occupied (read: non-rental) apartments, with the other 35% being condos.

The first co-ops in the United States were developed in New York City in the 1880s. Wealthy city-dwellers wanted well-appointed, centrally located homes without all the maintenance that came with a large house. Co-ops offered rich members an atmosphere of exclusivity compared to apartment buildings, because the co-op board had the power to approve who could move in. Many of the city’s most distinguished and coveted residential buildings from this era are still co-ops. 

Another wave of co-ops arose in the 1970s and ’80s when the city converted many apartment buildings owned by negligent landlords into co-ops. This allowed residents to band together to become owners, resulting in improved housing conditions. 

Although they are most prevalent in the New York City metropolitan area, co-ops can also be found in Washington, D.C., Chicago, and in smaller cities in the Midwest, especially in Wisconsin and Michigan.

When you buy a house, you’re buying “real property”: the structure and the land it sits on. Buying a condo is similar, in that you own everything inside the walls of your unit. A co-op works differently: it is a corporation that tenants take ownership in by buying shares. The number of shares you buy is proportional to the size and price you pay for the unit you live in. Shares are not “real property,” but rather “personal property.” 

The collectively-owned corporation that owns the building grants each member a proprietary lease that gives them rights to occupy their particular unit. Unlike a rental lease, this proprietary lease never needs to be renewed; however, the corporation can evict tenants for objectionable behavior by forcing them to sell. 

The corporation is run by the board of directors, a group of residents who are elected to make decisions on behalf of the whole building. The co-op board has a huge amount of power over what happens in the building, including inside individual units. Co-op board members interview potential buyers and often have strict financial requirements such as a certain income level and a certain amount in savings (usually two years of maintenance payments). This is because, unlike condo owners, co-op residents are mutually responsible for maintenance payments, even if some owners fall behind.

Co-op owners are required to pay a monthly fee on top of their mortgage to contribute to the upkeep and maintenance of the building. These fees range from many hundreds to thousands of dollars per month (but are usually lower than homeowners’ association fees for comparable condos). Prospective buyers should pay particular attention to the breakdown of the maintenance fees and what will cause them to go up.

Factors that impact monthly maintenance fees:

• Location. A Manhattan co-op will charge more than a Brooklyn co-op. 

• Age and condition of the building. Newer, nicer buildings will have higher monthly fees. 

• Staff. Door attendants, cleaning crews, and the like are all paid through maintenance fees.

• Amenities. More amenities mean higher fees.

• Utility costs. More included utilities mean higher fees. 

• Number of owners. In buildings with fewer owners, each owner pays more. 

• Building insurance. This is separate from your personal insurance. 

• Recent capital improvements. These lead to an increase in monthly fees. 

• Land lease if the building doesn’t own its land. To assess this cost, you’ll need to find out how long the land lease is, and how much it is expected to go up when renewed. 

• Possible underlying mortgage held by the corporation. This is usually small, but all owners pay for part of it.

Every type of housing has trade-offs, and co-ops certainly have their own set of complexities.  To eliminate surprises later, consider these features of co-ops before you buy.

• Price. Co-ops cost about 50% less than condos per square foot, but often come with high monthly maintenance fees. Make sure you consider both factors when you are projecting your monthly cost.

• Style. If you swoon over period details, co-op buildings are a good place to find classic prewar architecture. This is because co-op boards must approve all renovation plans with the goal of preserving the character of the building. If you do want to make major changes to your unit to reflect your personal taste, the co-op board may not let you. 

• Sense of community. Cooperation in the management of the building can contribute to neighborly sentiment, but a badly-run co-op board can become a major source of frustration. 

• Approval process. The co-op board approval process for new buyers can assure the financial health of the building, but can also be a headache when you’re the potential buyer and again when you want to sell. 

• Financing. Co-op boards often require a higher down payment than the standard 20 percent. A mortgage for a co-op is technically a “share loan,” a loan that allows you to buy shares of the co-op corporation. This kind of loan is more complicated than a traditional mortgage, so fewer banks offer them.

• Renting. Most co-ops have restrictions on subletting, so only move in if you plan to stay a while. On the rare chance you are allowed to sublet your unit, the prospective tenant has to be approved by the co-op board. This means that most co-op units are owner-occupied, which can benefit the building’s stability. 

• Appreciation. Market rate co-ops tend to not rise in value as rapidly as condos. Low-income co-ops (which have lower purchase prices and income restrictions) also appreciate at a limited rate. 

The ready availability and wide range of prices makes co-ops an attractive option, especially in expensive cities like New York City. But be sure to consider the hidden costs and potential pitfalls involved before you make a decision. Buying a co-op is more complicated than buying a house or condo, so a trusted real estate agent is especially important to have as a guide during the process. 

Although they’re usually one of the more accessibly-priced housing options on the market, co-ops can still be quite expensive—especially in New York City. Saving to buy one takes diligent personal budgeting. If saving for a co-op is one of your goals, opting for an affordable rental while you save can help you get there. Bungalow offers private rooms in shared homes that are less expensive than living alone. Find a Bungalow near you.