What Is a Co-op? A Different Kind of Homeownership

A co-op is a home you don't exactly buy. Instead, you're buying shares in a corporation that allow you to live in that home.

This can make financing a co-op difficult, since it's not actually a real estate transaction. But if you live in an area where co-ops are common, like New York City or Washington, D.C., a co-op could be a more affordable housing option.

Here's what you should know if you're thinking about buying a co-op.

» MORE: See other alternatives to single-family homes

What is a co-op home?

A co-op is a housing unit within a building or development that is jointly owned by all the people who live in its different units. These joint owners form a housing cooperative (hence, co-op) that is usually a type of nonprofit corporation.

Each owner is a shareholder, with shares allocated based on the market value of their unit. Like any corporation, a housing cooperative has a board of directors. But, as shareholders, everyone who lives there has a say in how the co-op is run.

A co-op is not the same as a condo, which is a type of real property that’s independently owned.

» MORE: What to know about buying a condo

How does a housing co-op work?

When you buy a co-op, you don't buy the unit itself. You purchase shares that grant you the right to live in the unit. Not only are the common areas and exterior owned by the corporation — the interior of the co-op is, too. This means if you want to do a major renovation, like a kitchen remodel, you may need the co-op board's approval.

You'll pay a monthly fee that covers your portion of the co-op's expenses, which can include paying part of the underlying mortgage for the entire property.

The housing cooperative's other expenses, like property taxes, shared maintenance and utilities, are also generally split among all residents, with the amount you pay determined by your unit's value. Dividing expenses in this way can sometimes work to the shareholders’ advantage.

While condos can appear to have a lower monthly payment, co-ops are often the better deal if you consider everything the fee covers. The monthly fees for a condo are typically used to maintain shared public spaces.

In contrast, while co-op fees may seem higher upfront, it's because they usually cover your portion of utilities like electricity and gas, as well as property taxes and maintenance. So the co-op’s monthly fee includes more than just upkeep — it bundles many of the costs you'd otherwise pay separately in a condo.

Buying a co-op may place limits on how much home equity you can accumulate or if you can accumulate equity at all. While market-rate co-ops accumulate equity much like single-family homes, limited- and zero-equity co-ops restrict your ability to profit if and when you sell your shares.

» MORE: Budget basics for new homeowners