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What is a co-op, and how does the financing work?

Yahoo Personal Finance· Getty Images
Updated 5 min read

Attention, team players! If you play well with others, there's a special type of housing that may be perfect for you. It's called "cooperative housing," or "co-op" for short.

Read more: How to decide between a single-family and multifamily home

Co-ops are all about collective ownership. Rather than purchase individual housing units, co-op owners collectively own and control their entire property, including the land, multi-unit buildings, and common-use areas (like walkways, parking structures, and swimming pools). To become an owner in a co-op, you don't actually buy real estate. Instead, you purchase shares in a corporation, which owns the property.

Despite their collective ownership structure, co-ops don't necessarily involve communal living. More often, owners receive an exclusive right to occupy a specific, complete unit rather than share bedrooms, living rooms, kitchens, or bathrooms within the property.

As with any type of housing, there are pros and cons to consider before choosing a co-op.

Owner control. Unlike renters, co-op owners have the right to elect board members to govern their cooperative. Owners can also amend the co-op's bylaws, which dictate how the co-op is governed and what rules owners and guests must follow. This cooperative approach gives owners a say in how their housing is managed and what rights and responsibilities they have as owners.

Affordability. Co-ops and condos share a lot of similarities, but co-ops are typically more affordable than condos.

Limited locations. Most co-ops are located in urban areas. The National Association of Housing Cooperatives lists Atlanta, Chicago, Detroit, Miami, Minneapolis, New York City, San Francisco, and Washington, D.C., as cities where co-ops are relatively common.

Fees. Like condo owners, co-op owners pay monthly fees that are used to maintain, repair, improve, and operate the property. These monthly fees can vary from modest amounts to substantial charges, depending on the property's size, location, age, and condition. Since co-ops are owned collectively, co-op owners' monthly fees also typically pay for property taxes. If the space needs major renovations that regular monthly fees alone cannot cover, owners may have to make special additional payments.

Rules. Co-op owners are subject to "house rules" that may pertain to pets, use of common areas, and remodeling of individual units, among many other matters.

Rental restrictions. Most co-ops have strict rules against subletting. If you plan to rent out your home, you should ask whether rentals are allowed before buying into a co-op.

Fewer lenders. Not all mortgage lenders offer financing for co-op buyers, and in some cases, requirements to obtain financing for this type of home may be slightly stricter than for other home types.

Buying into a co-op is a lot like purchasing any other type of home, but there are a few key differences.

Bigger down payment. Because co-ops have a collective ownership structure, lenders often require a larger down payment than they would for other types of homes. Down payments of 10% to 20% aren't unusual for co-ops, while single-family houses may require as little as 3% down.

Board approval. Co-op boards typically have the right to interview and approve applicants before buyers are allowed to purchase shares. The stated purpose of this process is to ensure that prospective owners are a good fit for the community and have the financial stability to be responsible owners. If you’re concerned that the interview process could lead to housing discrimination, know that you have rights and can take action in the case that you face unfair bias.

The federal Fair Housing Act prohibits discrimination in housing on the basis of race, color, national origin, religion, gender identity, sexual orientation, familial status, and disability. State laws may also provide even more protections. Home buyers who feel they've been discriminated against based on a protected characteristic can file a complaint with the U.S. Department of Housing and Urban Development.

Lender review. When you purchase a co-op, your mortgage lender will need to evaluate the property's finances as well as your own financial situation. This additional review is intended to help ensure your co-op is well-funded and can continue to operate.

Co-ops may look like condominiums or apartments, but their ownership structures are very different.

Co-op owners purchase shares in a corporation that owns all of the co-op units along with the land and common areas. With condos, the units are owned individually, while owners have a shared interest in the land and common areas.

Learn more: The differences between a condo vs. a house

Co-ops are residential units that are typically occupied by the co-op owners. Apartments are multi-unit investment properties that are owned by an individual, partnership, nonprofit, or real estate corporation.

Read more: Buying vs. renting a home

Selling a co-op may be more challenging than selling a detached home or condo because your buyer will have to be approved by the co-op board just as you were approved when you were the buyer. Some people may not want to go through this approval process. Others may be rejected by your board.

Co-ops generally may not appeal to buyers who don't want to participate in collective ownership. For those who like the idea and its advantages, co-ops are definitely worth checking out as a housing option.

If you're questioning whether a co-op is the right fit, explore all of your housing options. One of the following might be perfect for you.