Co-ops, more formerly known as housing cooperatives, are an established presence in the U.S. housing market, providing a variety of household types across various income spectrums.
But in both urban and non-urban contexts, a co-op is still a co-op … is still a co-op.
As the Washington Post points out, a co-op is a multiunit building where a co-op ‘owner’ has an interest or share in the entire building, along with a contract or lease that specifies the owner of those shares has the right to occupy a unit within that building.
If you’re unfamiliar with where this explanation eventually detours (and how it differs from just about every other housing scenario), here’s a spoiler alert worth noting: a co-op owner (unlike, say, the owner of a condo) actually doesn’t own the unit they’re living in. Instead, residents are literally invested in the property. They pay monthly fees that cover a portion of the co-op’s expenses, such as mortgage payments, maintenance, and property taxes.
All of this leads to two key questions — how do you build equity in a co-op, and how do you take that cash out?
More About the Structure of Co-Ops
Living in cooperative housing has been likened to apartment living, but the truth is that co-op housing takes on many different forms. According to Realtor.com, co-ops can be:
- Midrise or high-rise apartment complexes
- Garden-style or outdoor-style complexes
- Single-family homes
- Senior housing/senior living communities
- Student housing
- Mobile home parks
The residents within the co-op control the housing and (if applicable) all related facilities within the building or complex, says the National Association of Housing Cooperatives (NAHC). Typically, those residents make up a non-profit corporation, and each resident pays a fee to cover their portion of the operating expenses. In return, co-ops generally see lower turnover (vacancy) rates, lower real estate tax assessments (in some areas), controlled maintenance costs, and more.
But … What Do You Actually “Own” in a Co-Op?
The mortgage industry is a major financial sector in the U.S., with nearly $11 trillion dollars of mortgage debt outstanding on family residences in 2018, data from Statista shows.
Most people understand that a mortgage is a financial instrument that allows you to pay down your debt (the mortgage principal) each month, building equity in a home as each payment is made. But those involved in a co-op build equity a different way — as a shareholder, not as a mortgage holder.
Co-ops are collectively owned by their residents, who in turn are granted proprietary leases. That lease grants a resident the right to live in a unit and use all common areas and elements of the cooperative (according to a set of bylaws and regulations). Your equity comes from your buy-in, or shares, of the co-op.
To put it another way, since you are buying shares in a corporation rather than buying actual real estate, you might work with a type of loan known as a share loan, which is somewhat like a mortgage. It provides borrowed funds to buy the share(s). Monthly payments are then made on the share loan to the lender, with a monthly carrying charge (typically for maintenance and other necessities) paid to the cooperative.
Here’s the caveat when it comes to making money: In a co-op, any potential financial payoff will depend on the way the co-op is structured.
The Market-Rate Co-Op Structure
According to NAHC, a market-rate co-op is the most popular type of co-op. This structure allows you to buy or sell shares “at whatever price” the market dictates.
If you’re really all-in on a cooperative, you need to understand that the market rate prices can fluctuate, and will depend on things like housing market conditions and interest rates. In other words, significant gains and losses are possible.
It’s for this reason, and this reason alone, that you understand the nuances of a co-op before getting involved in one.
The Limited Equity and Zero Equity Co-Op Structure
Unlike market-rate co-ops, limited-equity co-ops are typically structured to preserve affordability for those with low-to-moderate-income who are seeking affordable housing. According to Shelterforce, an independent and non-academic publication, shares in limited-equity co-ops, more commonly known as LECs, have a cap on how much equity someone can earn in their unit (which means they can’t sell their share for a large profit).
This type of structure is designed to keep co-op communities affordable.
Finally, in a zero-equity co-op, members do not accrue any financial equity in their units, but in turn, pay rental rates below market value. This is also called a leasing cooperative, since the cooperative corporation leases the property from an independent investor. Since there is no real estate owned this way, the cooperative cannot build up equity (the same way a renter can’t build up equity).
Getting Cash Out On a Co-Op
Understanding the intricacies of equity and co-ops is incredibly important before you ever invest in one. That’s because if you’re looking to take cash out on a co-op, your choices are limited.
Experts say you can turn your co-op equity into cash by applying for a home equity line of credit (HELOC). In essence, it would allow a co-op shareholder to treat their unit like a credit card, getting instant access to money and using it to make improvements in the property or consolidate debt.
Some co-ops don’t allow HELOCs, according to Habitat Mag, but many also grant approval and don’t need to know what the money is for. However, such deals can limit the amount being borrowed to a certain percentage of a unit’s appraised value.
Your other choice to get cash out is selling your co-op, which presents its own unique set of challenges because the unit is part of a much larger building or complex. That means the other inhabitants, the co-op board, and the building will all factor into the sale one way or another.
Before you can even begin the process of selling a co-op, you’ll need to check with the board of directors and get more details on the procedure. In some co-ops, shareholders are required to sell the unit back to the corporation at the original price, with all the stockholders sharing in the profit when the unit is resold. In other co-ops, you get to keep the profit.
No matter what, you’ll need the necessary forms and board approval to move through the process. This can create a significant delay between the signing of a contract and the close of the transaction.
A Final Word on Buying into a Cooperative
Investing in a housing cooperative means you are buying a share of a corporation that owns real estate. Do your homework and your due diligence and investigate the building, the unit, and the corporation’s fiscal health. Your main objective should be a clear understanding of your obligations, and of the rules and regulations of the co-op community. This way when it comes time to cash out, you’ll have the patience and common sense to guide you through a successful deal.
- Condo vs. Co-Op: Know the differences before buying one, The Washington Post. Accessed from https://www.washingtonpost.com/realestate/condo-vs-co-op-know-the-differences-before-buying-one/2018/01/30/804e7bd6-faf5-11e7-ad8c-ecbb62019393_story.html
- What is a Co-Op?; Realtor.com. Accessed from https://www.realtor.com/advice/buy/what-is-a-co-op/
- Buying into a housing cooperative, National Association of Housing Cooperatives. Accessed at https://coophousing.org/resources/owning-a-cooperative/buying-into-a-housing-cooperative/
- Value of mortgage debt outstanding on family residences in the U.S. from 2001 to 2018, Statista. Accessed from https://www.statista.com/statistics/274638/mortgage-debt-outstanding-on-us-family-residences/
- Will limited-equity cooperatives make a comeback? Shelterforce. Accessed from https://shelterforce.org/2017/04/25/will-limited-equity-co-ops-make-comeback/#
- New ways to turn your co-op equity into cash, Habitat Mag. Accessed from https://www.habitatmag.com/Publication-Content/Legal-Financial/2017/2017-June/Home-Equity