You’ve found what looks like a great condo listed for sale, then you see it’s a co-op. So what does that mean? How is buying a co-op different from buying a condo? In this blog post we aim to demystify co-op living, explain how it differs from other real estate options, outline potential restrictions, and provide essential information for prospective buyers.
What is a co-op?
Co-ops, or housing cooperatives, are residential housing options where the residents collectively own the entire property. You buy shares in a corporation, and that corporation owns the building. Your shares grant you the right to occupy a specific unit and participate in the co-op’s management. This ownership structure differs from condos, where you own the individual unit and a portion of the common areas. Day-to-day living in a co-op might look identical to that of a condo; it’s the ownership structure that is the primary difference.
Co-ops tend to be less expensive alternatives to condos
Both condos and co-ops involve upfront costs and maintenance fees—but overall co-ops tend to be less expensive and costs are broken down differently. Initial purchase prices for co-ops are usually lower than condos but with higher monthly fees or dues. However, those higher monthly fees include not only maintenance on common areas but also property taxes and, in many cases, some or all utilities. With a condo, your property taxes are separate; utilities may or may not be included. (Typically garbage and sewer are included, sometimes water, but gas or electric is usually not included.)
Let’s look at a co-op for sale (as of time of publication) and a recently sold condo, both in Seattle’s Capitol Hill neighborhood.
As you can see, the co-op and condo are fairly similar, based on both unit features and community amenities (although the co-op has slightly more).
However, the co-op would cost the buyer $850 less per month than a comparable condo unit. Property taxes are included in the monthly dues for the co-op unit, whereas the condo owner would need to pay property taxes separately.
Keep in mind, of course, that while co-ops may be typically less expensive than condos, there are always exceptions to this.
You may get a better sense of community with a co-op
Co-ops have a vetting process for potential owners, and this helps to foster a strong sense of community. With shared ownership, residents work together to maintain the property and make decisions. This collaborative environment can lead to lasting friendships and a supportive living situation.
Assessing potential owners also helps to ensure stability with the co-op. The co-op can make sure potential new residents are financially stable and likely to contribute positively to the community. This can lead to a more stable and harmonious living environment.
Potential pitfalls of buying into a co-op
Although co-ops are terrific alternatives to condos and other traditional real estate options, there are challenges that come with this housing type that potential buyers should be aware of.
Financing may be more challenging
Finding a home loan for a co-op can be difficult. Condos are typically easier to finance because the physical property is used as collateral. With a co-op, since the owner is buying shares in a corporation, there may be more hurdles to overcome. For example, some lenders will not offer loans for co-ops, or they might require higher down payments. Or some co-ops don’t allow financing, meaning you need to be an all-cash buyer.
If you are starting a home search and want to consider buying into a co-op, make sure to bring this up with your lender. Keep your lender informed of your home search progress so they can make sure you get the right loan product for your transaction.
You need to get approval before you can buy in
As mentioned above, there’s a vetting process. This is a significant difference between co-ops and other forms of housing. The co-op board reviews applications and has the authority to accept or reject potential buyers. That means a buyer can be turned away for any number of reasons, even if they have the cash to pay for it. If you’re interested in a co-op, you can expect a criminal background check, a review of your financial profile and/or an interview.
You may not be able to rent out your unit
If you were hoping to buy a co-op and use it as an investment property, you’re out of luck. Most co-ops will not allow its owners to rent out their units. This could be true of condo buildings also, although to a lesser extent, as many condo associations do allow owners to rent out their space.
It may be harder to sell your shares in the future
Selling a co-op unit can be more complex than selling a condo or single-family home. In addition to buyers needing board approval, the pool of buyers may be smaller, simply because people don’t know about co-ops or understand how they work. Especially in the Greater Seattle area, where co-ops are less common, some buyers may not include co-ops as an option when conducting their home search.
What you should know before buying into a co-op
Before you buy into a co-op, just as with any other housing type, do your research. Read the co-op’s rules, learn about its financial health, and explore its community culture. A good way to do that may be to review the co-op’s bylaws, financial statements, and board meeting minutes.
A co-op can be a viable housing option for many buyers
Buying into a co-op in Seattle and Washington state offers a unique and appealing alternative to traditional homeownership. With its emphasis on community living, affordability, and stability, co-op ownership can be an excellent option for those seeking a different kind of home. However, potential buyers must be aware of the distinct differences between co-ops and other real estate forms, including the unique financial, legal, and lifestyle considerations.