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Co-ops for Dummies

by Shilpi Paul

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In light of our most recent Pursuit, where UrbanTurf publisher Will Smith wrote about his experience of finding and buying a co-op in Lanier Heights, we thought we would re-run a primer on the ins and outs of co-ops, which we first published in May of 2012.

If you’re looking to buy a home in a multi-family building in the DC area, chances are you’ve come across a number of co-ops. While less common these days, co-ops actually predate condos, emerging around the turn of the century. (Condos entered the scene in 1946.)

Basically, buying a co-op means you are buying a share in a corporation that owns the entire building, rather than buying the individual unit itself (which is what a condo is). A co-op association/board wields more power than a typical condo association, and financially, co-op owners usually finance a smaller portion of the purchase price than that of condo owners, while paying higher monthly fees.

Buildings where co-ops are located tend to pursue a higher owner-occupancy rate than condo buildings and may prevent owners from freely renting or renovating their homes, a restriction many potential owners find troubling. The co-op board can also seem like an undesirable hurdle to getting into your home. In many cases, these boards interview, vet, and can block each potential buyer.

Next are the higher association fees. These fees are often, fairly or unfairly, the reason that buyers shy away from co-ops. The main difference between co-op fees and condo fees is that a co-op fee typically includes an underlying mortgage and property taxes, in addition to amenity, maintenance and utility costs, which makes the fees notably higher on a co-op. Prices on co-ops are often discounted to offset these high fees. For example, a studio in Southwest, while listed at the appealing price of $139,999, carries an association fee of $703 per month. In comparison to condos, however, many co-ops boast lower closing costs, since there is no transfer tax (because there was no title to transfer). While an attractive aspect, a couple years ago the city tacked on an economic interest tax on the sale of co-ops.

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A co-op at 2122 California Street NW

This leads us to another element of co-op ownership, a confusing one, but something that will bring down a buyer’s initial outlay. Dominic Turano of First Home Mortgage explained that co-op buildings often have an underlying mortgage that exists either from the original financing of the building or from a mortgage that was taken out to fund improvements. The corporation takes on the debt, and each owner pays some portion every month, proportional to the size of their unit. The taxes and interest on this underlying mortgage are tax-deductible.

What this means for a buyer purchasing a co-op in a building that has an underlying mortgage is that, during the purchase process, they will be financing significantly less than the purchase price. For example, if you are buying a $300,000 unit and $130,000 of the price is the underlying mortgage, then the down payment you make would be a percentage of the remaining amount of the purchase price. In this case that would be $170,000, meaning that you would only need to pony up $17,000 if you were putting 10 percent down. Generally, information about the amount of the underlying mortgage is disclosed early on in the buying process.

Hopefully, this primer will be a helpful starting point when comparing co-op ownership to condo ownership.

Co-op owners, can you add any advice from your own experience to help UT readers who may be considering a co-op purchase?

See other articles related to: co-ops

This article originally published at http://dc.urbanturf.com/articles/blog/coops_for_dummies/5541

14 Comments

  1. Ryan said at 6:13 pm on Wednesday May 16, 2012:

    There are a few more reasons why co-ops want to keep owner-occupancy levels high.  First, when a co-op’s investor ratio starts to get high, banks get very nervous about lending, and it can make getting a mortgage nearly impossible.  Second, if a DC co-op is more than 50% owner-occupied, there are substantial property tax breaks.  With that tax break, a co-op unit pays substantially less in property taxes than a comparable condo unit pays.

  1. Karen said at 9:45 am on Thursday May 17, 2012:

    I could have used this information when I was doing my own comparison between DC co-ops and condos three years ago (comparing DC co-ops with NYC co-ops is an apples and oranges situation).

    I will highlight that not all co-op buildings have underlying mortgages and intimidating co-op boards.  My experience living in a co-op has been all positive.  The high owner-occupancy rates means I know my neighbors, people are deeply committed to the building and - on average - people live in their homes for longer periods of time bringing stability to all of our investments.

    Buying into a co-op also allowed me to live in a historic DC building making it possible to buy in a one-of-a-kind property.  In my experience, buying a co-op was a better value and investment than any of the condos I considered.

  1. Dave said at 12:44 pm on Thursday May 17, 2012:

    I bought a coop last year and this hits on all the major factors. I was worried about fees but after taking out property taxes and utilities I realized mine were only slightly higher than condos in the area.

  1. Jeffrey said at 2:15 pm on Thursday May 17, 2012:

    Thanks for posting this.  As a realtor that deals with a lot of co-ops, I regularly encounter buyers that have no knowledge of co-ops - or they have negative misconceptions about them.

    In many instances, it can be less expensive to buy and own a co-op due to the inclusive nature of the monthly fees.  Its important to note that coop fees include property taxes and many times several utilities (heat, gas, electric and sometimes WiFi!).  If you compare the monthly cost of property taxes on a condo, in addition to the condo fee, many co-op fees compare very favorably.

    My advice to buyers is to learn about co-ops before dismissing them as a viable option.  There are some beautiful co-op buildings in town that are truly wonderful places to live.

  1. Diane said at 2:54 pm on Thursday May 17, 2012:

    Co-ops are a really good option for those that want to get a bigger place without the high price tag while still staying within the city.

    If you are diligent about the fees, you can even end up paying extremely low monthly fees. For example, a number of co-ops currently on the market with co-op fees around $500 for a 2-bedroom mean (including taxes and utilities): this is very low compared with regular condo fees of $300 for a 2-bedroom to which you need to add utilities and taxes (which we know can be high!).

    Co-ops I visited in DC also tend to have this art deco feeling that gives them a lot of character…

  1. Susan Isaacs, Realtor said at 3:01 pm on Thursday May 17, 2012:

    I’m a Realtor who also works with co-op buyers and in my experience, co-ops fall off the touring list before buyers see them, mostly because an adequate explanation of fees, underlying mortgages and the pros and cons of cooperatives are not discussed. I created a handy infographic last year for my buyers that may help those new to co-ops. http://www.susanisaacsre.com/tools-2-use/dc-real-estate-co-ops.html
    Have fun out there!

  1. Raf said at 3:20 pm on Thursday May 17, 2012:

    My realtor actually kinda talked me out of buying a co-op, not for the underlying mortgage or the property tax talk, but because if I wanted to rent it out down the line, it would have probably been a tougher thing to do, whereas with a condo, you could just do it with no hassle.

    I pay $300 a month in condo fees, but that includes all utilities so that was a pretty good deal.

  1. Ryan said at 3:52 pm on Thursday May 17, 2012:

    Raf brought up a good point.  Many co-ops restrict renting in order to maintain high levels of owner occupancy.  Often you’ll have to have a qualifying reason in order to be approved to rent by the board (i.e. relocated for work or family illness), and even then it’s often for a limited time period (i.e. 1-4 years).

  1. Mary said at 3:32 pm on Friday May 18, 2012:

    I think this overstates it: “Often you’ll have to have a qualifying reason in order to be approved to rent by the board “

    I don’t really know of any that are that strict. Rental restrictions like limiting the years for which you can rent it are more common. I think things like that are growing more common in condos, too, though as they also have trouble getting financing if too many units are rented out.

    I think a very big virtue of coops and why, they often seem to be better maintained and to a higher standard than condos, is the ability to take out an underlying mortgage and finance renovations rather than having to pay for them through special assessments. The ability to finance over a long period of time (and take the mortage interest deduction for it) and to be able to pass that on to a next owner of a unit is really desirable. It makes major repairs and updates more affordable (and, thus, more likely)and saves you from being in the position of buying and then being stuck with a huge special assessment or paying for one just before you have to sell and move out.

  1. C said at 9:33 am on Thursday October 24, 2013:

    Some of this article seems to be written based on pulling information about coops that are not in DC but instead NYC.  As Karen pointed out, it is like comparing apple to oranges.  Coops in NYC are notoriously hard to get into (qualifications, interview by the board), much more than in DC.  Of course, these tend to be multi-million dollar coops. 

    There is a sales transfer tax associated with coops in DC, as this was enacted in 2010, if I remember correctly. 

    They tend to be less expensive than buying a condo, meaning that you were able to put far less down when buying one.  Not sure if this has changed (probably) following the financial crisis. 

    Don’t associate special assessments only with condos.  The Board for a coop can slap you with a special assessment, just depends on what the financials are for the building and the financial health of the coop.  If there is not enough money in the reserve, you could be slapped with a special assessment (either a one-off or increasing your monthly fees, if the costs can be absorbed over the long-term instead of immediately, as in an emergency). 

    I don’t really agree with coops being better maintained than condos.  It’s really up to the people who live there and the people on the Board, just as with any home.

  1. Tom Welch, Real Estate Broker said at 3:23 pm on Thursday October 24, 2013:

    When closing on a cooperative purchase, the title company is known as a Transfer Agent. Edmund J. Flynn Company has acted as Transfer Agent for the majority of DC cooperative transactions for years. Bill Karas published “Cooperatively Speaking”. It addresses many technical aspects of cooperative ownership. I have found it very useful in educating my buyer clients who are considering buying a coop. It can be downloaded at http://tomwelch.net/coop_2.html

  1. Mike said at 8:52 am on Friday October 25, 2013:

    This is an excellent article with amazingly astute comments!  Our orgnization, the DC Cooperative Housing Coalition (CHC), has a web site with additional information (http://www.coopsdc.org/), including a list of our 70+ member DC cooperatives (http://www.coopsdc.org/membership.htm), and a booklet we recently prepared called Co-ops 101.  That booklet is available as a free PDF download (http://www.coopsdc.org/Co-ops101 PDF.pdf).

  1. DC said at 1:27 pm on Sunday October 27, 2013:

    The “con” of rental restrictions vary from building to building. Nowadays, many co-ops AND condos have some sort of rental restriction policy. If too many units are being rented out, it affects prospective buyers from getting a bank loan.

    FHA loan packages require the building to be 51% owner-occupied. Bank loans generally have their own percentage of owner-occupied units too.

  1. co-op shareholder said at 11:11 am on Tuesday October 29, 2013:

    most in DC focus only on the negative aspects of co-ops (like rental issues, high fees) but on balance the positives can in at least some cases outweigh them—using an underlying mortgage instead of one-time assessments like a condo would for capital improvements, lower taxes, inclusion of utilities in the fee (which in my experience means the fee is not really that high at all b/c i’m getting quite a deal on not having individual metering for several utilities).

    one thing that i wish i had known before buying in, though, is the issue of comps in the real estate market.  appraisers will simply not comp a co-op against a condo, no matter whether it is identical on its stats and next door, they won’t do it.  and there are not that many co-ops relatively speaking in DC - meaning for better (or often worse in my experience), you are left with whatever sales, however many or however few, of co-ops are out there when selling, buying, re-financing, etc.  i understand the technical reasons behind this but in the end it still makes no sense to me.

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