How do I structure the finances of a co-op?

June 10, 2014

Here are some thoughts, not about any particular co-op. Instead, it is one person’s opinion based on the concept of cooperative ownership. The concept of cooperative ownership has a long history in the United States.

Hi-rise living

Hi-rise living

Reader Question: Monty, we are considering the co-op style of living. What are you and other folks saying about the way that this works regarding the buy-in and the monthly costs?

Monty’s Answer: Hello Mike, and thanks for your question. Here are some thoughts, not about any particular co-op. Instead, it is one person’s opinion based on the concept of cooperative ownership.

The concept of cooperative ownership has a long history in the United States. Here is a link to a definition and a brief history of cooperatives in Wikipedia.

To develop a sense of the underlying issues that have been a part of the evolution of the cooperative industry here is a link to a 1981 paper generated by the Ebenezer Society, which is located in Minneapolis, MN. They have been associated with cooperatives for a long time. It would be interesting to learn how they view some of the more recent entrants to the field. Also, it would be interesting to learn if their product offerings have evolved as suggested in the 1981 letter.

There are many articles to be found online with both positive and negative comments about cooperative communities. If you were to search “cooperative housing,” or “pros and cons of cooperative housing” many links will appear in the results screen.

There are different estimates of the actual number of units in the cooperative communities in the United States, but the best estimate I found from the US Census Bureau is less than 1% of the housing stock. This method of housing, although small, is an accepted segment of the national housing supply. It is the preferred lifestyle for more than a million families.

Tips to consider when searching the cooperative lifestyle:

  1. Do a lot of comparative shopping. Cooperatives are not necessarily organized the same way. The concept of comparative shopping is very important in this sector because the differences in the methods of organization can be striking. Take written notes on each project you are interested in acquiring the unit.
  2. The rules imposed on unit owners can be very different. Make certain you have a written copy of the rules to consider and that you know how the voting rights and by-laws affect how the “rules” you are buying into can be changed. As an example, some cooperatives control the value or price of your unit while others allow the free market to dictate the appreciation rates. There are pros and cons to controlled pricing versus free market. Make certain you understand them.
  3. Understand the motives of the promoters. While many cooperatives are labeled “non-profit” and certain laws regulate the activities of developers, seek to understand how revenue is generated and expended. Compare balance sheets from organization to organization, look for transparency and by all means have your own accountant review the financials before you invest. Cooperatives all promote their financial efficiencies as a benefit, and it can be true. But to keep readers from falling asleep, here is an article on Realtor.com about cooperative horror stories.
  4. Ask the right questions. How many units are vacant? How many re-sales have you had in the past 12 months? What is your annual budget for repairs and maintenance? Can I see the budget? How solid is your reserve fund? How much money do you have in reserve? When you tour the property, be on the lookout for deferred maintenance or shoddy repairs. Is the structure solid? How are the buildings constructed? Are they concrete and masonry or wood-frame? How is the sound attenuation between units? What are the repair and maintenance costs for which I am responsible? Are there any “up-charges” on operating costs? How is management paid? Can management be replaced?
  5. Ask for references from current residents (exclude board members) who have been there for a couple of years. Also, ask for references from residents that have sold their units. Why did they move on?

These tips and questions are not all-inclusive but to serve as an indicator of important issues to be focusing on when checking out cooperative living arrangements. Cooperatives have lost ground to condominiums although co-op’s had an enormous head start. It may be the most complex form of housing in the US. As a comparison, instead of real estate you are buying a share or shares in a corporation, so it has some similarities as to how one would go about due diligence with a publicly traded stock.