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Understanding Co-ops

What makes a co-op a co-op is its legal status. The three ways in which condos and co-ops differ: the definition of legal ownership, management, and your financing options.

Definition of legal ownership: Deed versus stock

When you buy a condo, you get a deed to your unit. When you buy a co-op, you get a stock certificate (to prove that you own a certain number of shares of stock in the cooperative corporation) and a proprietary lease, which entitles you to occupy the apartment you bought. The corporation owns the building.

In most cooperatives, shares are allocated based on a how big a unit is and what floor it's on. Thus, a top-floor apartment usually has more shares than a ground-floor unit of the same size. The more shares you have, the greater your influence in the co-op. You also have pro rata share of the cooperative's total maintenance expenses.

Management: Homeowners association versus board of directors

Stock cooperatives are corporations that are run by boards of directors elected by you and the other owners. Just like the homeowners association in a condominium, the board of directors is responsible for the cooperative's day-to-day operations and finances.

Financing your purchase

Getting a mortgage to purchase your co-op may be difficult. Many lenders flat-out refuse to accept shares of stock in a cooperative corporation as security for their mortgage. Conversely, some co-ops absolutely won't permit any individual financing over and above the mortgage the corporation has on the building as a whole. These co-ops believe that one proof of creditworthiness is your ability to pay all cash for your unit.

Don't buy a co-op if only one or two lenders in your area make cooperative-apartment loans. You'll pay a higher interest rate due to the lack of lender competition and lender concerns about the greater risks of co-ops. Worse yet, what if these lenders stop making co-op mortgages and no other lenders take their place? You won't be able to sell your unit until you find an all-cash buyer or until you have the financial resources to lend the money yourself to the next buyer.