Buying into a Housing Cooperative
What is a housing cooperative? (Download handout)
A housing cooperative is formed when people join on a democratic basis to own or control the housing and/or related community facilities in which they live. Usually they form a not-for-profit cooperative corporation. Each month they pay a fee to cover their share of the operating expenses. Personal income tax deductions, lower turnover rates, lower real estate tax assessments (in some local areas), controlled maintenance costs, and resident participation and control are some of the benefits of choosing cooperative home ownership.
What do I actually own?
The main distinction between a housing cooperative and other forms of home ownership is that in a housing cooperative you don’t directly own real estate. But if you don’t own real estate, what exactly are you buying? You are buying shares or a membership in a cooperative housing corporation. The corporation owns or leases all real estate. As part of your membership (as a shareholder) in the cooperative you have an exclusive right to live in a specific unit (this is established thorough an occupancy agreement or proprietary lease) for as long as you want, as long as you adhere to the cooperative’s rules and regulations. As part of your membership, you have a vote in the corporation’s affairs.
What does the share or membership purchase price involve?
When you buy a share or membership in a housing cooperative, you are paying for just that: a share of the cooperative housing corporation. The purchase price will vary depending on the neighborhood, the unit’s size if the cooperative limits resale prices, and if the cooperative has an underlying mortgage for the entire property.
What is a share loan?
Let’s say you are buying a $100,000 home. Most likely you would not be able to pay the seller the entire purchase price in cash. Instead, you would pay a down payment, and you would get a mortgage to cover the remainder of the price. In a cooperative, since you are actually buying a share(s) in a corporation rather than real estate, you get a type of loan called a share loan, which is like a mortgage. It provides you with borrowed funds to buy the share(s) from the seller. You then make monthly payments on the share loan to the lenders and a monthly carrying charge (maintenance) payments to the cooperative.
How do I accumulate equity?
Good question. It actually depends on what type of cooperative you are buying. There are different types of housing cooperatives including market-rate limited equity.
Market-rate housing cooperatives
In a market-rate cooperative you can buy or sell a membership or shares at whatever price the market will bear. Purchase prices and equity accumulation are very similar to condominium or single-family ownership.
Limited-equity housing cooperatives
In a limited-equity housing cooperative (LEC) there are restrictions on the proceeds members can get from selling their shares. These are usually imposed because the cooperatives’ members benefit from below-market interest rate mortgage loans, grants, real estate tax abatement, or other features that make the housing more “affordable” to both initial and future residents for a specified period of time. In some cooperatives these limitations are voluntarily imposed by members. These restrictions are usually found in the cooperative’s bylaws. The documents may also establish maximum income limits for new members to target the special benefits of the housing to families who need them the most.
Leasing cooperatives (or zero-equity)
In a leasing cooperative, the cooperative corporation leases the property from an outside investor (often a nonprofit corporation created for this purpose). Since the cooperative corporation does not own any real estate, the cooperative does not build up any equity (just as a renter doesn’t build equity). However, as a corporation, the cooperative is often in a position to buy the property if it comes up for sale later and convert to a market rate or limited-equity cooperative. And some leasing cooperatives allow outgoing members to take at least part of their share of the cash reserves built up by the cooperative corporation while they were shareholders.
What do monthly charges cover?
Almost all cooperatives charge residents a monthly carrying charge (often called a monthly maintenance fee). The amount of the monthly charge varies and typically covers your proportionate share of operating and maintaining the cooperative, which can include blanket mortgage payments, property taxes, management fees, maintenance costs, insurance premiums, utilities, and contributions to reserve funds.
Do I pay real estate taxes?
Taxes are assessed on the cooperative corporation, as owner of the property. Your monthly payments to the cooperative are, in part, used by the cooperative to pay the real estate taxes. Even though you don’t pay real estate taxes directly, federal tax law allows you to deduct your share of the cooperative’s tax payments, as well as your mortgage interest payments, on your personal income tax return.
Can cooperatives discriminate?
Like any other form of housing, cooperatives cannot discriminate based on the protected classes listed in the Fair Housing Act, which include race, color, religion, sex, familial status, national origin, or disability. Historically, the basic cooperative principles include both open membership without restriction as provided by law and non-partisan in politics and non-sectarian in religion. However, many cooperatives are selective in approving memberships. As communities of people who share a financial obligation and responsibility for governing how they want to live together, it is important for cooperatives to ensure that incoming members can meet their financial obligation and will abide by the rules of the community.
What do most housing cooperatives look like?
Cooperatives can be almost any kind of housing, and there is a wide variety in looks and sizes. Housing cooperatives may be high-rise apartment buildings, garden-style apartments, townhouses, single-family homes, and senior housing.
There are other types of housing cooperatives. Mobile home park cooperatives usually own the land, utilities, and community facilities; their members own the individual “mobile homes.” Some other housing cooperatives own land and community facilities and use legal documents including recorded covenants as the basis for maintaining the desired cooperative controls over functioning of the cooperative community.
What questions should I ask before buying into a cooperative?
Remember, since you are buying a share of a corporation that owns real estate, you will want to find out about the corporation’s financial health. You will also want a clear understanding of what your anticipated financial obligations to the cooperative. Be sure to find out all the rules and regulations of the community. Here are some sample questions to ask before making your investment:
- What is the share price?
- Where can I obtain share loan financing?
- How much are the monthly carrying charges?
- What is the underlying mortgage?
- What is your pet policy?
- What is your subletting policy?
- What is the policy for making alterations to my unit?
Confused on any of these terms? Check out our glossary. Also, to understand your rights and responsibilities as a cooperative resident, visit Living in a Housing Cooperative. If you have any legal questions about cooperatives, consult an cooperative legal professional right now and get your questions answered!
I’m interested in moving into a housing cooperative. How can I find a cooperative in my area?
Search your local housing authority’s website to find a housing cooperative in your area. For a complete listing or to speak to a housing consultant, visit the U.S. Department of Housing and Urban Development (HUD) website for more information about locating a cooperative in your area. Additionally, a local real estate professional will be able to offer assistance. Make sure your search criteria includes “multi-family” housing.
- Affordable: Lower down payment, much lower closing costs, economies of scale, and a longer mortgage term all make cooperatives more affordable than other ownership housing.
- Living in a Cooperative Stays Affordable. Members have no reason to substantially increase monthly charges unless taxes or operating increase; typically monthly charges remain reasonable.
- Tax Deductions. For income tax purposes, the cooperative member is usually considered a homeowner and, as such, can deduct his or her share of the real estate taxes and mortgage interest paid by the cooperative.
Equity. Cooperatives can provide for accumulation of individual member equity. For market-rate cooperatives, the accumulation of equity and resale prices are based on the market. Limited-equity cooperatives establish limitations on the accumulation of equity to ensure long-term affordability to new members.
- Limited Liability. Members have no personal liability on the cooperative mortgage. The cooperative association is responsible for paying off any mortgage loans. This can often make it possible for persons whose income might not qualify them for an individual mortgage to buy a membership in a limited equity cooperative.
- Consumer Action. Through their cooperative association, members can jointly exert influence to change tax rates and utility prices and obtain improved services from local governments. The cooperative, as consumer advocate, also can join with other organizations and/or coalitions.
- Savings. Cooperative members can benefit from economies of scale in cooperative costs as well as from not-for-profit operation. Also, when there are “transfers,” only the out-going member’s equity must be financed by the incoming member. Transfers of shares are subject to fewer settlement costs.
- Elimination of Outside Landlord. Cooperatives offer control of one’s living environment and a security of tenure not available in rental housing.
- Community Control. As mutual owners, member residents participate at various levels in the decision-making process. This is not true of tenants who usually do not have the opportunity to exercise input into the landlord’s decisions. Members own the cooperative collectively and can remain in their homes for as long as they wish, as long as they meet their monthly obligations, and abide by the cooperative bylaws, rules, and regulations.
- Cultural Diversity. Many cooperative members say that the possibility for interacting with people from different backgrounds, cultures, and income levels is a positive factor in their decision to become a member.
- Extended Services. By establishing cooperative procedures and working together, people can provide services for themselves that otherwise would be impossible to obtain. When one cooperatively organized venture is successful, it often becomes clear that people can be successful in another area as well. As a result, the original effort often can be strengthened. Examples include athletic teams, cooperative preschools, credit unions, tutoring, food-buying clubs, arts and crafts, and senior health care and support services.
- Shared Maintenance Responsibilities. Cooperative members usually have limited direct maintenance responsibilities. The cooperative association is responsible for major repairs, insurance, equipment replacement and upkeep of common grounds and facilities.
- Vandalism and Security. Cooperative members vigorously protect their association’s property. An important benefit of converting rental properties to cooperative ownership is reduction in vandalism and abuse of property and improved and shared security arrangements. And recent studies show that a cooperative’s presence in the neighborhood reduces neighborhood crime.
Standard Cooperative Practices
NAHC members agree that cooperative housing associations are most successful when operated in accordance with specific recommended practices, in addition to the general cooperative principles.
The cooperative’s board of directors should keep its members informed of all its actions. A regular communication system (a frequent newsletter, information bulletins, special meetings, solicitation of members for opinions and priorities) strengthens the relationship between the board of directors and the members. Leader accountability is central to the cooperative concept. The board of directors should depend upon the two-way nature of communication to guide them in all decision-making.
The cooperative association must maintain adequate financial reserves to protect the cooperative and its members’ interests. These usually include a general operating reserve and a reserve for replacing components of buildings as they deteriorate. Such reserves reduce the possibility of members having to pay unexpected special charges in emergencies. An annual audit should be conducted by professional accountants and made available to all members.
To protect the interests of the remaining residents, the cooperative board must have the right to approve incoming members who replace those leaving the cooperative. A credit check and a visit with the membership committee are usually required. This process also helps orient the incoming member to their rights and responsibilities as cooperative members.
Subleasing should be restricted if allowed at all. If permitted, the length of the sublease agreement and the amount of payment should be determined by the cooperative. To allow subleasing on any larger scale is seen as a return to absentee rental ownership.
If you have any legal questions about cooperatives, NAHC always recommends to consult an a cooperative housing legal professional or a housing attorney.
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