If you’re moving to an urban area, or you currently live in one, and you’re in the process of finding a new home, you’re likely to come across the term cooperative housing, or more frequently, co-op. A co-op is a type of homeownership structure that’s most common in large real estate markets.

There are similarities between co-ops and condos, but also some differences.

The Basics

A co-op is often a type of homeownership you’ll see in places like New York City, in apartment buildings. A co-op is a building jointly owned by a corporation, and when you buy into one, you’re not buying a piece of property. Instead, you’re buying shares in a non-profit corporation. That non-profit then lets you live in the building.

If you buy an apartment or condo, you can think of it as buying whatever lies behind your door. It’s one of many units of which you own one.  

A co-op has terms that say when you buy, you’re a shareholder. The size of your apartment determines how much of a stake you have in the building.

When you live on the premises of the co-op, you have access to common areas that the corporation owns.

Everyone in the co-op shares in the responsibilities and costs of maintaining the property.

A board of directors governs a co-op, and they set by-laws. Those by-laws indicate how you’re supposed to be a respectful inhabitant of the building, but since you’re a shareholder, you also have some say in the running of the building.

The Logistics of Living in a Co-Op

When you buy a condo, again, the difference is that you’re purchasing the ownership of an individual unit where you’re going to live.

If the property goes up in value, you benefit from that because you’re the deedholder. Condo residents tend to have a fair amount of autonomy about things like renovating and making upgrades.

Getting financing for a condo tends to be simpler than doing so for a co-op.

With a co-op, you’re paying for the rights to live in the building, but you don’t outright own it. That limits the changes you can make. There’s also a stringent application process that you have to go through when you buy a co-op, and you may have to do an interview with the board. They’ll also probably vet you financially.

The co-op as a nonprofit means the board governs your life within the building. For example, you might not be allowed to sublet your apartment.

When shared financial obligations arise, all the owners of the co-op are responsible.

How Do You Buy a Co-Op?

As you might imagine, buying a co-op can be a challenge because you’re not actually buying a home. It’s tough to finance a co-op since you’re buying shares in a corporation rather than going through a real estate transaction. In many big cities where co-ops are common, despite the complexities of buying, it can be a cheaper option.

Rather than getting a mortgage, you would get a loan to buy shares in the cooperative, known as a share loan or co-op loan.

When you apply for this type of financing, the lender will usually look to see the basic operations of the co-op and the underlying mortgage. The lender will go over how the board is run and check for major planned expenses.

Big co-ops in certain areas may have existing relationships with lenders, which can help someone as they’re buying in the building.

Co-ops often let residents sell their shares to another buyer at the current market price. The current market price is also known as a market-rate co-op, but others are more restrictive if you want to sell.

When you buy a condo, by contrast, you get a mortgage like you would buy a house. You’re buying physical property, and then you share the common areas and help pay for the costs of maintenance related to those.

Finally, a co-op board can require that someone has a particular net worth before they allow them to buy shares because they’re looking at the ongoing sustainable success of the corporation. A condo can’t put these types of financial requirements in place. If a condo buyer can get a mortgage and buy the unit, there’s nothing to stop them.