If you want to become a homeowner, you better be prepared to spend a big chunk of change. According to the U.S. Census Bureau, the average sale price for a new home in August 2017 was $368,100. Because lenders and financial experts recommend keeping your mortgage payment under 30 percent of your income, that price can be prohibitive.
Worse, $368,000 might not buy you much if you’re in an area with a high cost of living. For example, you’d need $435,000 to purchase a 264-square-foot apartment in San Francisco.
Unaffordable housing is a major issue, but one way to avoid those sky-high prices is to join a housing cooperative. An alternative to traditional homebuying, co-op housing could reduce your costs. Here’s how it works.
What is cooperative housing?
Co-ops take the idea of teamwork to the next level. Instead of an individual buying a plot of land and a house, a group of people form a co-op, pool their resources, and purchase and maintain a property.
Most housing cooperatives are small nonprofit organizations. Tenants pay a fee each month to cover their share of expenses, such as property taxes, utilities, or maintenance costs.
Residents often have more control under a co-op than they do as renters with a landlord. Each person has a voice and can help make changes that better the community within the co-op. If the cooperation suggests installing a fitness center or community garden, you can vote for or against those changes.
However, there is one important distinction between buying a home and entering a co-op. In cooperative housing, you don’t actually own your home. Instead, you use your money to buy shares of the co-op.
As a shareholder, you have the right to live in a particular unit and stay there for as long as you want, as long as you follow the rules and regulations and pay your bills on time.
While owning shares rather than real estate might sound scary, living in co-op housing has a lot of benefits:
- Affordability: Because you’re purchasing shares within a co-op, you don’t need a large down payment like you would with a traditional mortgage. Co-ops have lower payments and lower closing costs.
- Steady housing costs: If you rent your home, your landlord can raise your rent when it’s time to renew your lease. With a co-op, the costs are much more steady. You typically only see nominal increases based on factors like increased property taxes or the need for building repairs.
- Tax deductions: According to the IRS, you’re still entitled to many of the same tax benefits and deductions as traditional homeowners. You can likely deduct your share of the corporation’s real estate taxes.
How to find co-op housing
Co-op housing is common in many urban areas. Large cities such as New York, Washington, D.C., and Seattle have several co-op developments.
If you live in a suburban or rural area, your chances of finding a co-op are lower. However, new cooperative housing units form every year, so it’s worth checking often to see if a development is opening near you.
The Cohousing Association of the United States maintains a comprehensive database of co-op properties in the U.S. You can also contact your local housing authority to find more information about properties in your area.
How buying into a co-op works
You shop for a cooperative just like you would a traditional home. You’ll probably need to choose a realtor who can help you find the right unit.
If you need financing to buy into a co-op — and most people do — you can take out a loan, but it won’t be a mortgage. Instead, it will be a share loan. Share loans work similarly to mortgages but typically require a smaller down payment because co-ops are so much cheaper than traditional homes.
Not all lenders offer share loans, so it’s a good idea to ask the co-op or your realtor for suggestions.
Keep in mind that your share loan is only a portion of your monthly expenses. You’ll also have a regular maintenance and upkeep fee you’ll pay toward the cooperative each month, in addition to the usual expenses for utilities. Even so, buying into a cooperative can make good financial sense in the long run.
For example, in Richmond, California, the median price for a two-bedroom home is $445,000. At that price, you’d need $89,000 to put down a 20 percent down payment for a mortgage. By contrast, you can buy a co-op unit in the same city for just $250,000 and would need $50,000 for a 20 percent down payment.
But just because a unit is available and you have the money doesn’t mean your acceptance is guaranteed. When you submit your application, you and your family will have to meet with the co-op board for an interview to see if you’ll be a good fit for the community.
Building equity on co-op housing
If your goal of homeownership is building equity, joining a co-op is likely not for you. In many cooperative housing complexes, there’s a limit on how much equity you can accrue. Co-op boards set those limits to keep members from selling their shares for huge profits, which would cause the prices to increase.
Instead, the true benefit of a co-op is that it provides an affordable housing option in areas with high costs of living. Instead of spending thousands to lease a modest apartment, you can get a home for a fraction of that price by buying into a co-op.
What to ask before joining a housing cooperative
Buying into a co-op is a huge decision. Every cooperative housing unit works differently and has its own rules, so make sure you ask the following questions before you buy any shares:
- What is the share price?
- Where can I get share loans?
- Do you accept pets?
- Can I make changes to my unit?
- What are the monthly costs?
Depending on where you live, co-ops can be restrictive. Some co-op complexes don’t allow you to make changes to your unit. If you want granite countertops or want to knock down a wall, you’ll have to ask the board’s permission first, and they can say no. Asking these questions can prevent misunderstandings later on.
Changing how you think about housing
If you’re struggling to find affordable housing, co-op housing could be the perfect solution. You can live in a unit for much less than you’d spend on a traditional mortgage or rent, and have the benefits of an established community.
If you’re not sure about what type of home is right for you, check out our ultimate guide to housing costs.
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