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A few weeks ago a reader emailed us asking “I get that houses and condos are super pricey right now, but I just found this co-op in my neighbourhood that’s still reasonably priced. Is that a good idea?”
To which my response was “What the Hell is a co-op?”
Turns out, in the spectrum of home types you can buy that range from “detached single family mansion” to “tiny box in the sky,” there exists a weird and relatively obscure breed of housing called the co-op, or housing co-operative.
They physically can look like anything from an apartment-style dwelling to a cluster of townhomes. The type of housing isn’t what makes a co-op a co-op, rather it’s the ownership structure. But one thing that everyone immediately notices when they encounter a co-op listing is that they’re priced way, way lower than the equivalent house or condominium.
So what gives? Why are co-ops so much cheaper? Is there a catch?
Oh, you bet there is. And to understand that, we first have to dive in to the ownership structure of a co-op.
Basically, when you buy a co-op, you don’t actually physically own anything.
Confused already? Well, buckle up, cause this ride’s just getting started.
Most people understand that in a real estate transaction, you pay the money and in return you get a house or condo. Easy peasy, right? Not in a co-op.
In a co-op, nobody directly owns anything. Instead, a nameless, faceless corporation owns the actual buildings. That corporation elects a board of directors who oversee the actual day-to-day management of the building. That corporation also issues shares which can be purchased by individual investors, and then allocates units in the building based on how many shares each person owns.
So when you buy into a co-op, you’re not actually buying any land or real estate. You are buying a share of a corporation, and based on that share of the corporation, the co-op will allow you to occupy a unit that it owns.
As with everything, there are advantages and disadvantages that come from participating in a co-op versus a more traditional ownership structure, and while we don’t have the time to get into every little legal nuance, a few major differences jumped out at me while I was researching this article. And in no particular order, they are the following…
You Can’t Get a Mortgage
Say what? I must be joking, right?
Nope. It’s true. A bank will not give you a mortgage if they find out you’re buying a co-op with it.
Why? Simple. A “normal” mortgage is a loan that’s written against a real asset you own as collateral, namely a house or condo. But remember, for a co-op, you don’t actually own anything, or at least not anything that counts as real estate. So if the bank were to write you a mortgage and you default on your payments, the bank can’t foreclose on your house because again, you never owned that house to begin with.
See the conundrum?
Instead, a loan used towards a co-op is classified as a “Share Loan.” Instead of loaning you money collateralized against a home, they’re lending you money so you can buy a share of a corporation.
It’s also far less popular than traditional mortgages and you may have to hunt around for a smaller, more obscure credit union to get one. Here in Canada, for example, none of the major banks seem to offer these, and the big American banks don’t either.
Where you can find them, the loan terms are a lot more expensive than a traditional mortgage. Because these types of loans aren’t CMHC/FHA insured, the bank considers these higher risk and therefore the interest rate and down-payment requirements are higher.
So even though on the surface co-ops may seem cheaper because the sticker price is a lot lower than traditional houses or condos, the difficulty and added expense in obtaining financing for it means you actually need more cash on hand to close the deal than with a traditional mortgage. So the mirage of a lower price may not actually help you that much if you can’t qualify for a mortgage on a regular condo.
So already, we can see that buying a co-op is starting to get pretty complicated. And this is just on the financing side, because even after you get you get your money ducks in order, there’s still the next hurdle…
The Board Decides Who Can Buy and Sell
When you are buying a house or a condo, if the buyer and seller agree on a price, that pretty much means the sale is going to happen (barring any unforeseen things happenings before closing). However, in a co-op, agreeing on a price is only the first step. Because after that, you have to convince…the dreaded co-op board.
They’re called Board Interviews, and are basically a panel-style interview by the Board of Directors to convince them to let you move into their community.
Every co-op’s Board of Directors exercises veto power over who is and isn’t allowed to purchase one of their shares. On paper, this is because each co-op wants to build a certain type of community. Some co-ops cater to artists, others to students, and others simply want people of a certain financial status to be part of their community.
If this sounds like a setup for annoying power-trippers…you’re absolutely right. Think of a condo board, but with more power. Yech.
It’s not all bad, though. Having a co-op board vet candidates means that they can do things like exclude speculators from buying the unit, renovating, and then flipping it for a quick profit. It also means they can forbid AirBnbs or amateur landlords. Generally, co-op boards want long-term residents who actually want to live there.
But it also means you’re going to have to suck up big time to get in. So bring your kneepads to the interview.
And unfortunately, the co-op board’s power over you doesn’t end once you convince them to let you in. And that’s because…
You can be evicted
I was shocked to learn this, because generally buying real estate means that you no longer have to deal with an annoying landlord that could evict you at any moment. But again, when you buy into a co-op, you don’t actually own any real estate. You own a share in a corporation, which the co-op board uses to grant you a right to live in one of their units. A right that they can take away if you violate any of their rules.
Rules can include:
- No pets
- No parties
- No overnight guests
- No sub-leasing
- No redecorating
- No renovating
Obviously not every co-op is this restrictive, but many are, and if you are found to be in violation of their arbitrary rules and by-laws, they have the power evict you.
Now, co-op boards’ power isn’t absolute. Evictions have to go through the same process that landlords of rental properties have to go through to evict a tenant, so depending on what state/province you live in, this may be a very long drawn out process that favours the tenant, or this may be short process that favours the co-op board, but the point is despite paying hundreds of thousands of dollars to live in a co-op, you effectively still have a landlord.
Who Should You Buy A Co-op?
I have to admit, I didn’t know what co-ops were when I started researching this article other than they were generally cheaper than traditional houses and condos. And as I learned more about co-ops, I realized that they’re cheaper for a reason.
There are many reasons to own a home rather than rent. Maybe it’s because you hate being under the thumb of a landlord. Maybe it’s because you want control over your living space. Maybe it’s because you think it’s a good investment.
None of these reasons seem to apply to a co-op. You still have to pay a lot of money (though not as much as a normal home), you still have to ask someone’s permission for everything you do, you’re still living under a de-facto landlord that can evict you at any moment, and you don’t even get the benefit of your real estate’s value going up over time, because again, you don’t actually own any real estate!
Co-ops just seem like they combine the worst aspects of renting and owning, while conferring none of the benefits of either.
So should anyone buy into a co-op?
To be honest, I’m kind of struggling with this one. I suppose that if you can’t get a mortgage for some reason, you have a lot of cash lying around, you don’t care about making money on your purchase down the line, and you really really like the community that the co-op represents, then I guess a co-op might make sense for you.
I’m just really not convinced many people would be in this situation.
What do you think? Has anyone ever bought into a co-op before? Have you found the experience positive, or negative versus renting or owning a traditional house or condo? Let’s hear it in the comments below!
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