There
are three ways to own real estate in the United States: fee simple,
condominium, and cooperative.
Fee
simple is the most common-- it is the legal method of owning a single
family house and the plot of land below it.
Condominium
owners hold the right to the interior space of a defined unit and
a share of the land it sits on.
Cooperatives,
or co-ops, are where a corporation owns the entire building and
shares of the corporation are sold to buyers. A person who owns
shares is entitled to occupy a specified unit within the building,
but does not directly own that unit.
Daily
life within a co-op is very similar to a condominium, but buying,
selling, and subleasing substantially different.
House
cooperatives are largely a historic relic. The legal basis for owning
a condominium wasn't established until the National Housing Act
of 1961. So if the unit you are considering buying is inside a building
older than 1961, there is a good chance it is a co-op. Even though
most new buildings are condominiums, cooperatives still have their
uses in modern real estate development. All fifty states have laws
on the books to allow cooperative housing.
The
most frequent new type of co-op is a mobile home park, where residents
buy a share of the land and gain the right to park their trailer
on the property. Rental apartment buildings that lack individual
utility metering are frequently converted to cooperatives when they
are sold. Co-ops are also found in situations where the building
does not own the land it sits on.
According
to the National Association of Housing Cooperatives, 1.2 million
Americans live in cooperative housing. Co-ops are common is older
cities like Philadelphia, San Francisco, and Washington because
there are many buildings constructed before 1961. The largest preponderance
of co-ops is in New York City, where 85% of all multifamily units
are owned as cooperatives. Co-ops are also found in situations where
a group of people desires communal facilities and specialized living.
Student cooperatives offer inexpensive housing near many college
campuses. Artists, the hearing-impaired, and elderly individuals
have also established co-ops throughout the country.
Co-ops
fall into three categories: full market rate, limited equity, and
no-equity. Full market rate co-ops are similar to condominiums-the
shares can be sold for whatever the market will bear. Limited equity
co-ops restrict the resale price of shares to enhance their affordability.
No-equity co-ops are the cheapest, and least common, of all. As
the name implies, the owner's shares cannot appreciate in value.
It is important to understand which type of co-op you are considering
buying, since lenders usually steer clear of no-equity and limited-equity
co-ops.
Mortgages
can be obtained for a co-op. A primary difference is that a buyer
must select a lending institution from a pre-approved list maintained
by the co-op board. Banks demand that the co-op board sign an agreement
to foreclose on the owner's shares if the mortgage defaults. A list
of approved lenders can be obtained from the co-op's management
office. "Share Loans," as co-op mortgages are officially
known, are available in most varieties available for traditional
mortgages. Purchasers can select from adjustable rate, fixed rate,
or hybrid loans. Because of the added risk of writing a co-op share
loan, rates are generally .25% higher. Most major banks have gotten
into the co-op mortgage business, so buyers should be able to find
financing with a well-known, reputable institution. A 20% down payment
is required for a co-op mortgage. Home equity lines of credit (HELOC)
are generally not available for co-ops. Of course, a monthly fee
is charged to owners by the co-op board to maintain the communal
property.
There
are several advantages to purchasing shares in a housing co-op.
Foremost is the affordability of the share purchase price. Because
co-ops require a large down payment and usually cannot be subleased,
prices are generally lower than a comparable condo. Even though
the purchase price is lower, owners can expect the property to appreciate
at the same percentage rate as comparable condos. Co-op owners are
eligible for all favorable tax treatments available to other real
estate owners, including mortgage interest and real estate tax deductions.
Cooperative
housing has other financial benefits. Real estate taxes are almost
always lower than condominiums because the building is assessed
a whole instead of as individual units. Imagine there are two identical
buildings, one of which is a co-op, the other a condominium. The
condominium is comprised of 10 individual units whose value is $100,000.
Taxes due on each unit come to $500 a year (or 5 mills). The co-op
is assessed as one big piece of property worth $500,000. Using the
same millage rate, the building owes taxes of $5,000. Divided among
the shareholders, this is only $250 a year.
Of
course, there are drawbacks to co-op ownership. Many co-op boards
strive to keep owner-occupancy very high by forbidding or severely
restricting the ability to sublease a unit. Boards can also implement
rules that condo boards cannot. Examples are: owning of pets, playing
of musical instruments, and the number of nights a guest can stay
with you. Co-op boards can also block a sale of shares for any reason.
Finally, the housing corporation has final say on disposal of the
property. If the majority of shareholders want to sell the property,
it can be sold over the minority's objection.
Buyers
will find that housing cooperatives are a viable option for them
to live. While they are somewhat nontraditional, co-ops fill an
important need for housing in older cities and areas with high cost
of living.
