Should You Buy a Co-op?

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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.

Ownership Structure

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.

Weird, right?

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
  • Etc…

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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27 thoughts on “Should You Buy a Co-op?”

  1. There’s a legendary coop half a dozen miles away from where I live now, incorporated in the early ’50s with roots back to the ’30s. Everyone I know who lives or has lived there loves it — we considered it back in 2010 but nothing available suited our needs at the time. The community is kind of outstanding. Granted, many of the above caveats still apply; do your homework… but I’d be comfortable buying in there.

    https://www.ghi.coop/

    1. I lived in a GHI coop for 5 years or so. You can get a loan, and GHI provides a list of financial institutions that loan to GHI members. Each coop unit has its own, market-determined value, and you do get to keep the gain (or loss) when you sell. We bought in 1997 for $69K and sold in 2002 for $110K. (Had we kept it for another year, we’d have gotten over $200K based on neighboring unit sales!). The homes, library, swimming pool, community center, food store, and cafe are all connected by walkways separate from streets. If you obey the rules–and you get a copy of the rule book when you join–you can’t really be evicted. The big downside for FIRE is that you can’t rent out your unit. Oh–there’s a hefty monthly coop fee. It was about $450/month when we bought in, more even than the mortgage payment. It covers maintenance and taxes. Our roofs and water heater were replaced during the time we were there, covered by that fee.

      1. Hi, neighbor! You bought the year I graduated from the big high school just over the B/W Parkway footbridge. A friend has her 1BR/1BA GHI unit on the market right now; coop fee is $450, according to the listing. Seems like they’ve kept it surprisingly reasonable after two dozen years of inflation.

  2. “you don’t get to see your investment value appreciate when house prices rise” … but wouldn’t the value of the corp. rise, and you could sell your shares for higher?

  3. It really depends on the co-op. If you find a community of like-minded people, then I think it’s a great idea. From what I know, members tend to be a lot closer than in other living arrangements. For example, apartment dwellers rarely know their neighbors well.
    Might not be the greatest investment, though.

  4. DON’T DO IT! Co-op boards have free reign to do what they please, when they please, however they please, regardless if detrimental to buyer/seller, etc. My brother-in-law was trapped in his NYC co-op for years b/c outdated/discriminatory bi-laws. Co-op boards are one of the last remaining entities in the US that can legally discriminate based on race/gender/sex/nationality, etc. – shit is crazy.

  5. Sounds like a good investment if you are the owner of the co-op / corporation that owns the co-op but not a good investment to buy into at a lower level than that

  6. Okay. So I’m pretty sure many folks will post here listing the factual errors in your kinda shoddy research here. Suffice it to say the great majority of ALL housing in New York City (at least Manhattan) are co-ops. Banks can and DO offer mortages for co-ops. The large Co op corporation you mention is by and large “you” – that is all the shareholders in the building. You all own it together.

    The main and probably only good reason to buy one is so that you can (somewhat) afford to live in NYC. I’ve lived in two.

  7. I live in Manhattan and own a co-op. Not only are they cheaper, but they’re better quality buildings in general and usually have the most pre-war charm.

    Yes you can get a mortgage for them, and you save about 20% over similar apartments in condos.

    The downsides are many…you can’t get a reverse mortgage, you can’t really sublet easily, and you can’t make money from AirBnb. If you want to sell, you’re basically trapped until the co-op board approves your buyer.

    I have lived in two, am finally getting out of my second one, and would not recommend ever becoming part of one again. Although my building is well run, you have to kiss ass to maintain peace. Don’t do it.

  8. In New York City, the only way (or almost way) to buy a property is through a coop. I bought the first one and sold it (with a good margin of profit). Now I live in my second coop. Doesn’t feel bad at all.

  9. I owned a co-op in Manhattan. I truly enjoy it. I don’t have to worry my neighbor uses their apt as an Airbnb or changing renters like a revolving door. It’s much safer.

  10. Don’t forget about the “flip tax”, the fee the seller pays to the Coop when you sell….typically from 1% to 3% of the sale price…ouch!

  11. Does the reader not know you guys wrote an article in 2015 saying housing is a scam and you should not buy real estate?

    After real estate prices have risen by over 100% since 2015, why are you even contemplating for the reader to buy?

  12. Renting in a co-op is also an option (in Canada specifically?). Often a long waiting list to get into one and you have to be aligned with the co-op community focus but rents can be significantly under market rates. Here’s one in Toronto where a 2-bedroom apartment will cost just less than $1400 a month compared with the average of $2600 for a 2-bed in Toronto in general: https://bainco-op.ca/floor-plans-rates/

  13. I think, Wanderer, you are trying to fit a co-op into your existing financial paradigm where it doesn’t fit.

    I am from a country where co-op ownership (or a close variant) is the norm, and in Canada lived in a student co-op.

    The decision to live in a co-op (at least in Canada, I know little about the US and NYC), is more of an emotional connection to a community than a financial one.

    Imagine for a second two couples who reached FIRE. One couple decided to become digital nomads, the other decided to put roots and bought a house and land in a small rural community. Both couples have already solved the financial issue, now the question is how they want their life to look like. One wants excitement and flexibility (nomads), the other wants stability and connection to a local community. (of course, I’m over-simplifying).

    This is the same with a co-op. It is *not* just an ownership structure.
    It is a community of like-minded people who chose to live in proximity and share life values, usually with increased interactions and often some social events.

    It is not about the price, the mortgage, the valuation etc.

    And when you join a community of like-minded people it is normal for the community to vet who joins and who doesn’t, as well as having some sort of mechanism to ex-communion people who really fell out with the community in a bad way. This is also why the waits are so long, community members don’t just pick up and leave on a regular basis. They like to stay with the community.

    So like the FIRE couple who chose nomadic vs rooted life, choosing a co-op is first an emotional decision, not a financial one.

  14. I’ve been in a co-op for 14 years now…. There’s good and bad. Yes the board can decide who gets to move in, but there’s really a lot less “veto” power than it sounds like. Yes, if someone is trying to AirBNB it they can be denied, but that’s usually written into the bylaws about subletting. But if someone has the money or financing to buy in and found a seller that agrees it’s next to impossible to say no without some sort of discrimination lawsuit. The fact that they force the meeting with the board is just dumb and outdated. It makes sellers (members) frustrated when it takes 90 days instead of 30 from an agreement on a sale price to closing.

    There are some good aspects too though. If a water heater or wall heater breaks, it’s covered by the co-ops reserves rather than the individual in the unit. Anything behind the wall breaks, the co-op steps in again.

    So there’s good and bad. They are more common on the east coast rather than the west (I’m in SF so no one here really has ever heard of them). I just would rather not deal with a large membership because I feel like the number of people in the co-op makes it hard to get anything done.

  15. Whoa, that’s an interesting real estate asset class that I haven’t even heard of or seen. I had no idea that even if you buy into it, you can still be kicked out. Very interesting.

    There are so many asset classes that I don’t know of that goes beyond traditional real estate and stocks!

  16. I’m in New Zealand and the coop sounds a lot like retirement villages over here. We moved into one as my husband is a lot older than me and I have a serious heart condition and I am concerned about the future. Basically, we purchased a “right to occupy” for the rest of our lives. It is cheaper than a similar home but has fees should we decide to sell as well as monthly fees that cover property taxes, water and external building and land maintenance and building insurance. There are also rules around pets, age at entry etc. Our decision to move in was based on a desire to recover capital from our home along with a lot of emotional reasons. These include the social opportunities for my husband as I still work part-time, removal of worries about home maintenance as well as good access to support services when we need them

  17. This article is not well researched. Love your blog and book, but you are generalizing and just wrong on a lot here. I live and own in a coop in nyc, with a mortgage from a large bank with an interest rate of 4%. Is it the best investment probably not, but the statements above oversimplify and mislead. Hope this helps keep up the good work.

  18. I live in a co-op in Toronto. I specifically only looked at co-ops, co-ownership and co-housing structures when I went property shopping because that’s the type of housing situation I wanted to live in.

    Each co-op is different so I’ll talk specifically about the one I’m living in. There are 32 units so it’s entirely feasible to know all my neighbours. The dreaded co-op board that you spoke of so fearfully in your post consists of my neighbours or, if I so choose, I could volunteer to sit on the board.

    There are restrictions on renting, you can only rent to family members, but for me that is a plus as I had no desire to live in a ghost hotel. Three of the 32 units are rented and I like the fact that the majority of the units are owner occupied as I feel it leads to a better maintained building.

    There are other by-laws in place but as it’s a co-operative, and we all collectively own the complex, the by-laws can be reviewed and changed by the members. While the volunteer co-op board keeps the day-to-day stuff running, major changes have to be presented to the membership and put to a vote.

    The most important by-law seems to be ‘don’t do stuff that pisses other members off’. So, for example, pets are allowed. But if you have a dog that howls all hours of the day and night, well then you have to decide between living at the co-op or owning the dog. A more personal example, my unit comes with a garage, but I don’t own a car. So I turned the garage space into a workshop because I like to tinker. Since it’s not bothering anyone, nobody bats an eye about this. Most condo boards would shit a cow if an owner did that.

    As for selling the unit, I can sell to a family member without approval from the board. The next ‘step’ is I can sell to any existing member without approval from the board. After that, the unit gets listed on MLS except that most times it doesn’t because the unit is sold privately to a friend of an existing member once word has gotten out that you want to sell. Both private sales and open market sales do require board approval, however my board interview was not particularly onerous and I’ve not heard of a buyer being rejected. In my co-op, the seller keeps any capital gains from the sale and there is no fee paid to the co-op upon selling.

    Mortgages are available from credit unions (but not the major banks) and the rates are similar to borrowing against your portfolio – because that’s what you’re doing, you’re borrowing money using corporate stocks as collateral, so the rates and conditions are similar.

    As for evicting people, that is very much a last resort option. There are internal dispute resolution procedures that have to be followed first before it ever gets to the eviction stage (these are separate from the landlord/tenant procedures required by the province for evictions – those come after this procedure has failed). But it is an option and I’m okay with it. When I lived in a single family house, a neighbour’s son moved back in with her. Turns out he was a crack head and next thing we knew there were incidents of petty theft up and down the street. We knew who the offender was, but there wasn’t a damn thing any of us could do about it. If that happened in my current building I imagine the individual would be required to move out.

    As far as renovations go, there are no restrictions on renovations done within the walls of my unit, for example, I recently installed a ceiling fan, which included running the wiring to a new ceiling fixture – no board approval required. If I want to knock out any of the existing walls, I would need board approval. Depending on which wall I want to take out, they may ask for an engineer’s report to verify that the modification won’t cause any structural problems. Personally, I see this as totally reasonable.

    In summary, if you want to walk in to your unit, close the door and never interact with anyone, than a co-op is not for you. But if you want to live in a community, and you’re okay with rolling up your sleeves and getting involved, than a co-op may be a very good fit for you.

  19. I also live in a co-op in Toronto. Ours is a little different – it’s rental only. So you don’t buy any shares, you just pay the monthly fee. There are quite a few similarly structured co-ops in Toronto, so if you are looking for a creative solution to your housing “problem”, then read on.

    When we moved in about 6 years ago, we realized that co-ops are the best-kept secret in the city where the rent is sky-high. Our co-op is located in the heart of the downtown, St Lawrence market area, walking distance to pretty much anything worth walking to. In fact, this area has a lot of co-ops and many other ones are located centrally. There’s even one in Rosedale!

    My husband and I are sold on renting forever, but you always have to compromise either on the quality of the building/your neighbours or on price. From a financial standpoint, you really can’t beat the co-op prices. Our co-op is made up of townhomes, so our unit is a two-story two-bedroom unit with a large patio + covered parking. The monthly fee (=rental fee) is less than $1200, which includes internet & cable (and HBO package!). Bell makes deals with co-op and condo boards – they get large volume for low per-unit $$. Where else can you rent a 2-bedroom in Toronto for this much money, leave alone downtown? If this sounds like I am bragging, that’s because I am. I am convinced that we’ve solved the housing “issue” for ourselves which allowed us to become FI in our 30s!

    We do have a co-op board, which is made up of my neighbours and occasionally my husband and each member of the board is only allowed to stay for 2 years. ANYONE living in the co-op is expected and encouraged to volunteer, including on the board. The whole point of co-op living is that there’s no “they”, it’s only “us”. The prices are so low because there’s no landlord to get rich collecting your rent. Our monthly fees are meant to cover maintenance, the office manager’s salary and the rest goes into the reserve – to help pay for improvements like a new roof or kitchen appliances.

    In exchange for this sweet deal, each member is expected to a) pay their rent and b) volunteer once in a while – participating in committees, attending neighbourhood association meetings, coming out on a cleaning day. Is that a lot to ask?

    To get into a co-op like this yes, there’s a selection process and that’s because we want new members who are responsible and trustworthy (i.e., will pay rent, will not party all night every night). There are NO unreasonable demands on the applicants. In fact, the member selection committee and the board are subject to the human rights code of conduct. We as a co-op can be sued if we discriminate against a potential member.
    Being evicted is also incredibly hard, even if you stopped paying rent. This may be just a Canadian thing, but the law is there to protect the renter more often than not.

    It may sound cheesy, but my favourite thing about living in our co-op is the community. It’s the first time in my life that we actually are friends with our neighbours – we get together for birthdays and summer parties, we entrust our dog to them when on vacation, we watch out for amazon deliveries for each other… None of the previous rental buildings we lived at had this kinda atmosphere.

    So if you are reading this and are interested in joining a co-op, I suggest you don’t get discouraged by long waiting lists and get on a list anyway. What do you have to lose? And also, if the office manager tells you that the waiting list is currently closed, ask them to save your info and notify you when it opens – sort of getting on the waiting list for the waiting list. This trick worked for us. Miraculously, no one on the official list wanted the upstairs unit and we took it!

  20. Thanks for the well researched and presentation of the topic …love your transparency of “I don’t know…”!

    With regard to “CO-OP” and in the realm of RE in general, the rule of thumb is…
    if the banks are not playing the game, no one should!

  21. There is another type of Co-op housing. I live a co-op in Victoria, BC. Ours was acquired through a land gift from the City to the association in the 1970s. We were provided with a mortgage to build our townhouses through CMHC. When my husband and I moved in a couple of years ago we were required to buy into the share of the association ($3900), and our monthly housing fee is $876 for a two bedroom townhouse with a basement in Victoria West. We’re a 5 minute drive to downtown, 5 minute drive to the ocean. Right now, the going rate to rent a property like ours is well over $2,000 a month. And I don’t even want to know how much it would cost to buy outright. We cannot be evicted, except by supermajority vote buy our entire membership of 74 families. It’s very very rare that this happens, and it usually takes years of documenting rule breaking before it happens. We have members who moved in in the 1970s and raised their families who now have their own families. We can renovate our units (with approval from our maintenance committee to ensure that its to code and not a significant departure from the design. So no tearing down walls, but we can put in new kitchen cupboards if we want, new appliances, paint, etc.) We can have two pets. We can built patios if we like. We have a common community garden, playground, apple orchard. We rode out the pandemic without any need for government support, even though a couple of our members were furloughed. We have a healthy multi-million dollar reserve fund that enables us to deal with unforeseen circumstances, replace our roofs when they need to be replaced, etc. This is truly the missing middle housing that gives people an opportunity to take a breather financially. My husband and I have been able to rapidly pay off debt we accrued when we were paying eye-wateringly high rental rates. It’s been kind of like winning the housing lottery. It comes with pros and cons. We know all of our neighbours. We go to eachother’s birthday parties, and share gardens together. Our kids play throughout the grounds the way that kids played outside in the 80s. But sometimes we piss each other off, as neighbours do. It’s not perfect, but it is a cohesive and successful community. Just wanted to share this, because there is another kind of “co-op” housing and its not what is described here.

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