Co-op Must Knows Before Purchasing
Condominium Associates is here to help you understand what a Co-op is and whether or not it’s the right investment for you.
Are you considering growing your rental property portfolio? Then you may want to invest in a Co-Op. But before you do, it's critical to know if it will be a good investment or not for you. It would be best if you weighed the risks and challenges so that it could pay itself off.
What is a Co-op?
A Co-op is short for Housing Cooperative. With a Co-op, you're buying shares in the corporation that owns the building. Therefore, you're not buying property/real estate. Instead, you're purchasing the exclusive right to live in that particular apartment and become a shareholder—the more significant (and more expensive) the unit, the more shares of the corporation you own.
A board of elected managers, who are residents of the building, runs the Co-op. This type of management style is similar to COAs or HOAs. The committee usually imposes rules that tend to be stricter than COAs. These rules could include pet policies, subletting allowances, guest limitations, moving restrictions, or contractor choice for renovations.
Types of Co-ops
There are three different types of Co-ops you might see when shopping around. They differ based on pricing and ownership of the building.
Market Rate Co-op: Members can buy and sell shares at whatever rate the market bears
Limited Equity Co-op: The board sets restrictions on the price at which shares may be purchased and sold
Leasing Co-op: The corporation leases the building instead of owning it and does not build equity
Should You Buy a Co-op?
If you enjoy getting to know your neighbors, then you may want to buy a Co-op. Unit owners are more likely to be active in the management of the property. They also appreciate social interaction with other residents and believe in communities coming together often.
Co-ops is, while less expensive than a condo, do not have the same type of amenities than condos do. Also, you should know that condos are typically new construction with a modern look. If you are looking for luxury living or a luxury rental property, you’d be better off purchasing a condo.
How Do Boards Choose Unit Owners?
Per the Fair Housing Act, boards cannot discriminate applicants based on race, color, religion, sex, handicap, age, familial status, and national origin. Florida bans housing discrimination based on sexual orientation and gender identity. It is important to note, however, that the Co-op board can be restrictive based on whom they allow purchasing units. Co-ops often have guidelines in terms of potential buyers' liquid assets, income, and character. Therefore, if you don’t want someone delving into your private life, you may be better served to purchase a condo.
How Do You Purchase a Co-op?
The application and approval process is lengthy and very invasive. Get ready for the Co-op boards to look into many personal aspects of your finances and life, including your net worth, income, debt, tax returns, and resident status. The board will look into your references, conduct a background check, and interview you. From all the information they gather, they'll decide on whether they approve of you or not. Sound subjective? It is—it's like screening someone for a high-stakes job to determine if it's the right fit. Buyers usually work with their real estate brokers to help them assemble their board package—all of the paperwork and documentation— and prepare for the interview.
Additionally, Co-ops want more than 20% put down—some might require a 25% down payment or even more. They may also require you to work with a specific lender to take out a "share loan." This loan works like a mortgage in the sense you make payments to a lender. You'll also get a similar tax treatment as homeowners would deduct yearly interest on your loan. At the closing, you'll sign a lease to formalize your right to occupy the apartment you bought.
Be sure to purchase a well-managed Co-op. You will want to review the financials of the Co-op to be sure of this. Because the Co-op owns the building—unless it's a "leasing Co-op"—you will want to make sure you're not giving money to an organization that could go bankrupt. For the most part, Co-ops are heavily owner-occupied. Those who complete the screening and buying process genuinely want to live in the building and enjoy the exclusivity it affords them.
Can You Rent Out Your Co-op?
If you want to rent your Co-op, it will depend on the rules of the Co-op surrounding renting. Co-ops typically have strict rules in place regarding the timeframe in which you may rent out the unit. These rules mean you might be able to rent it out only two years out of every five years—which may limit the kind of leases you can offer as well. It can vary as some buildings may allow tenants to stay past their lease term on a month-to-month lease. Additionally, it's common to have a clause stipulating that you must have lived in the apartment a particular length of time before being able to rent it out.
Renters or sublets will also likely be subject to board approval and have to go through a similar application process buyers complete. You'll have to pay fees for the building, the managing agent, or both.
Hire Us to Help you Manage Your Co-op
Condominium Associates is here to help you meet the challenges and demands of a well-run Co-op. Our team of professionals is ready to assist you in preserving your community's standards and board mandates.