What Is a Co-Op? (Short Answer: Much More Than You’d Think)

Keep in mind, however, that no two co-ops are exactly alike, and that some may have rules about how you finance your purchase. In other words, co-op restrictions may mean that you’re not the only who has to pass muster with the board—your choice of financing does, too, to the point where banks may not want to lend you money for this particular co-op because of its financing restrictions. Or it may mean that, even if you can find financing, the co-op bylaws will stipulate that buyers meet even higher standards than the bank’s.

“For example, conventional financing allows up to 50 DTI [debt-to-income ratio] on conforming primary residence purchases,” Shahwan says. “Many co-ops max their DTI eligibility at 35, or sometimes lower. This means that even though a lender may approve a buyer for financing, they may not fit within the co-op guidelines.”

It can get even hairier.

“Not only that, but many banks do not offer financing programs for co-ops,” Shahwan says. “Layering in the tighter guidelines for the borrower set by the co-op board and fewer banks able to finance the building make it harder for buyers to close on a co-op.”

It’s not all bad news though! Co-op buyers have a leg up when it comes to closing costs, Shahwan notes.

“Co-ops do not incur transfer taxes, so although the overall costs are similar to that of a condo, a buyer can save a substantial amount eliminating the transfer taxes,” he says.

Pros and cons of co-ops

Co-ops are popular for a reason, especially in highly populated markets where living close to your neighbors is the norm.

“Similar to owning stock in a public corporation, ownership rights in a co-op allow residents to participate in decision-making processes to share their perspective and voice their ideas regarding the property,” Shahwan says.

And because of the vetting process, co-ops, at least theoretically, ensure that the people who live there are on common ground when it comes to how to live in and run the place.

“Many believe that having a board interview will allow each buyer to be vetted into the building, providing more security to the overall community and its shareholders,” Shahwan says.

Finally, co-ops are generally less expensive to buy than a similar condominium.

There are downsides, too, of course.

For one, the monthly charges in a co-op tend to be higher than in a condominium, at least partly because co-ops tend to present shareholders with a single monthly bill that includes all the charges at once, like electricity, water and property taxes. If the co-op has had to make a major capital improvement, such as a roof renovation, the co-op board may vote to raise the maintenance to help pay for that, as well.

“Monthly common charges in a co-op are often higher than monthly HOA fees,” Shahwan says.

Secondly, you don’t get a deed, which may or may not be a big deal to you.

“Rather than a deed, owners of a co-op are given a proprietary lease allowing them rights to live in the specified unit,” Shahwan says.

Finally, bringing in new faces, either by subletting your unit or selling it, automatically brings on the scrutiny of the board of directors and may run afoul of co-op bylaws that may restrict sales or take a large percentage of the sale price to replenish the co-op capital funds. Many co-ops forbid renting out units altogether.