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Housing cooperatives began in New York City and now provide homes for over 1.5 million individuals across the United States. See more real estate images.
Rob Schoenbaum/Time Life Pictures/Getty ImagesJohn Lennon of The Beatles was a member of one. Madonna was turned away by one. So was former President Richard Nixon. What are they? Housing cooperatives, or co-ops, are particularly prevalent in areas like New York City, but many people don't fully understand how they operate.
With the rise of condominium ownership, many are now familiar with how condo associations work. Co-ops share some similarities: They consist of multiple housing units, are governed by rules and regulations, run by elected officers and directors, and require residents to contribute to maintenance and utility costs through monthly fees. However, there are key differences, especially regarding ownership structure.
When you purchase a property in a housing co-op, you're not actually buying real estate—you're purchasing shares in a corporation, which owns the property. This corporation owns the building, and your ownership stake is no larger than that of any other member. You obtain the right to live in the unit through a proprietary lease or occupancy agreement.
When you move out of a co-op, you sell your shares. In some co-ops, you may be required to sell them back to the corporation at the original purchase price, with all stockholders collectively sharing in any profit made when the shares (unit) are resold. In other co-ops, you keep the profits for yourself.
On the following page, discover what makes co-op ownership attractive to homebuyers and why it can be challenging to gain entry into a co-op.
Today, there are over one million cooperative housing units across the United States, primarily in major cities. The first co-op was founded on West 18th Street in New York City in 1876. Initially known as "Home Clubs," these co-ops were created to offer wealthy individuals the benefits of home ownership without the associated responsibilities.
What makes co-ops so special?
Would you want the constant flash of cameras next door? Co-ops frequently turn away celebrities.
Brian Ach/WireImage/Getty ImagesOne of the main appeals of co-op ownership for many individuals is its tax benefits. The building’s taxes are divided among the entire co-op, so as a shareholder/tenant, you don’t receive an individual tax bill. Instead, your share of the tax burden is included in the maintenance or carrying fee you pay to the co-op each month. At the same time, you enjoy the same federal income tax deductions for your share as any other homeowner.
While a condo owner has the freedom to sell their property to anyone, the collective ownership aspect of a co-op means its bylaws generally require approval from the board of directors for potential shareholders. This gives the co-op control over who can move into the building. (This can be beneficial if you’re already a co-op owner, but may be a challenge if you're trying to join one.)
The approval process involves a detailed review of the applicant’s finances. This doesn’t necessarily mean you need to be wealthy; the board just wants assurance that you are financially responsible, employed, and pay your bills without defaulting on your debts. While this may feel restrictive, it’s for a good reason: If one tenant defaults on their mortgage, maintenance, or tax payments, all the shareholders are required to cover the loss.
In a condo, failure to meet mortgage or tax obligations results in liens on your property, preventing its sale. But in a co-op, as a co-owner of your home, the other owners share the responsibility for your failure to pay. If this happens, the corporation might not be able to cover the burden, leading to foreclosure, and the loss of all shareholders' interests. This is why co-op boards meticulously review prospective buyers—one problematic shareholder can affect everyone.
The board approval process also applies to tenants if you ever wish to sublet your co-op. Some co-ops limit subletting by imposing time restrictions and other controls to maintain the integrity of the corporation.
This thorough scrutiny typically results in a high-quality group of owners. Co-op shareholders tend to be financially responsible individuals who follow the organization’s rules and are genuinely invested in the property's and corporation’s well-being. Consequently, co-ops generally experience low default rates and stable occupancy, which is another appealing aspect of this type of ownership.
Continue reading to discover more benefits of co-op ownership and explore the various types of cooperatives.
Think that wealth and fame grant you the privilege to live anywhere? Ask the mega-stars who’ve been turned away by co-op boards concerned about the negative publicity that might follow. Co-ops in New York City are famous for rejecting celebrity applicants. Madonna, along with other high-profile figures, has faced rejection due to concerns about paparazzi and fans disturbing the building's peace and quiet.
Various Types of Housing Cooperatives
Not every co-op is located in an urban area. As environmental concerns have increased, some groups have founded co-ops like the EcoVillage in New York, focusing on sustainable living.
Robert Nickelsberg/Getty ImagesBeyond tax advantages and low turnover, co-ops offer additional benefits:
- Financing: Home loans often come with favorable terms, such as low down payments and closing costs. In a co-op with its own mortgage, buyers typically need less financing compared to condo buyers.
- Limited liability: While you’re responsible for your personal loan, as a shareholder, you don’t have personal liability for the co-op’s mortgage.
- Community control: Shareholders are involved in property-related decision-making.
- Consumer influence: Co-ops, as an association, can wield influence over local governments and utilities.
- Surplus revenues: In some cases, unused funds are distributed back to shareholders (similar to receiving dividends from a company’s stock), though they may need to be reported for income tax purposes.
With all these benefits, you might be eager to apply for a co-op. But hold on! First, you need to decide what kind of co-op fits your needs. As outlined below, co-ops aren’t just for wealthy Manhattan residents. They cater to all income levels through their various types and can also serve as a tool for economic development.
- Market-rate co-ops: These operate like any other market-based property, where you can buy or sell shares based on market value. You build equity similar to other homeownership options.
- Limited equity co-ops: These co-ops are typically designed to provide affordable housing, offering benefits like lower-interest loans, tax breaks, and grants. In exchange for these reduced costs, restrictions are placed on how much equity can be accumulated and how much profit can be made from selling shares. These co-ops are ideal for individuals whose income might otherwise prevent them from owning a home.
- Leasing co-ops: Also called zero-equity co-ops, these properties are owned by external investors (often nonprofit organizations) and leased back to the corporation. If the property becomes available for purchase, the co-op may buy it and potentially transform it into one of the other co-op types.
- Mutual housing associations: These nonprofit entities are established to create, own, and manage housing. The corporation is owned and controlled by the residents who live there.
There are also co-ops specifically designed for elderly residents, government-subsidized co-ops, and rural cooperatives to support farmers. To learn more, follow the links provided below.
Loans for purchasing stock in housing co-ops are quite similar to traditional home loans, with one key difference: they are not referred to as "mortgages." Instead, they are called share loans. The interest paid on these loans is tax deductible just like any other home loan. Additionally, the same capital gains tax rules apply when you sell: If you have lived in the home for at least two of the past five years, the first $250,000 of profit is exempt from federal income tax.
