A co-op is a multi-unit building owned and run by and for the building residents. When you buy into a co-op, you purchase shares in the company that owns the building. The shares give you the right to live in the co-op apartment under a proprietary lease. Co-op residents have an equal say in what the co-op does and how it is managed. As the arrangement is driven by values and not just profit, co-operative residents may experience lower housing costs than other apartment-dwellers.
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You Own Shares, Not Bricks
When you buy a condo, you buy a physical apartment in a multi-family residential building. You have a deed, and that deed tells the world you are the outright owner of the real estate. When you buy a co-op, you buy a share in the corporation that owns the entire building. You do not receive a deed, and you do not own any real estate. Instead, you receive a share certificate documenting the amount of stock you hold in the corporation. In general, the larger the apartment you buy, the more shares you will receive.
Shares Buy You the Right to Live in the Apartment
Co-op shares buy you the exclusive right to live in the apartment for as long as you own the shares. Your rights and responsibilities are similar to those of a tenant. For example, you may be asked to maintain the interior of the apartment and behave respectfully towards your neighbors. The corporation has landlord-type duties, such as the upkeep of the building and the payment of expenses such as heat, building insurance, property taxes and the mortgage. You and other shareholders will pay a monthly maintenance fee to cover these expenses. These fees are usually charged at cost.
Getting In Is Tough
Co-ops are usually managed by a board elected from and by the co-op owners. Boards are free to set their own admission standards as long as they do not violate discrimination laws. They have a reputation for being selective about who they let in to the building. This is because all shareholders must contribute towards the building's running costs. If one owner defaults, the others have to pick up the tab. Expect financial net-worth tests and a rigorous interview.
Share Value May Rise with the Property Market
Market rate co-ops let shareholders buy and sell shares at "market" rates. The market rate is whatever price a buyer is prepared to pay for the share keeping in mind the value of the building as a whole. In a market rate co-op, the value of your share should go up if property values rise, and vice versa. Limited equity co-ops restrict the sale price. Under this arrangement, you likely will not realize a capital gain on your shares if the building appreciates in value.
The Bottom Dollar
Whatever type of co-op you choose, you should check the company's financial situation before you commit. Co-op corporations, like any other home owner, can default on the mortgage. If the mortgage gets foreclosed, your proprietary lease gets canceled. In this scenario, your co-op converts to a for-rent lease and you still will have to pay back the loan you took out to purchase the shares. Fortunately, the strict admission criteria means that foreclosure happens only rarely.