Well first of all, they’re not condo co-ops, they’re just co-ops. But this misconception remains that they are some sort of “condo-style” form of ownership, when in fact, they’re far from it.
A lot of my clients ask me rather bluntly, “What’s the deal with co-ops?” since the prices look too good to be true, and are clearly attractive.
Personally, I think they are in fact too good to be true, but in the end it depends on the buyer, and what that particular buyer is looking for.
Let me explain…
That would be great, wouldn’t it?
The idea of a “co-op” being a bunch of people, working together, living in harmony, and managing the property themselves?
In reality, and at the risk of generalizing, I might say that co-ops offer just as many problems as condominiums, perhaps more.
At least with a condominium, a property management company (with their pros and cons, of course) is overseeing the entire building, and they’re a third party, who works at the request of the condominium corporation, via the board.
With a co-operative, the residents often self-manage, self-govern, and maybe even self-discipline.
Aside from management, there are massive differences between condos and co-ops, and I feel that in case anybody doesn’t know the two forms of ownership inside and out, this post is essential.
In filming my last two Pick5 videos, I refer to co-operatives but I don’t really go into detail. Once again, I feel this post will pick up the slack.
There are a host of smaller issues with co-ops, or to be fair, let’s call them “differences,” since “issues” might not apply if the resident values these differences.
Pets are often an issue, since many co-operatives don’t allow any pets.
Sales are difficult, since they require board approval.
Renting the unit can be made difficult, since it requires board approval as well.
I don’t want to re-hash my entire blog post from 2010, so if you want to know every difference between a condo and a co-op, read it HERE.
These differences are incredibly minor in nature compared to the bigger issue – and yes, it’s an “issue,” as you’ll soon learn.
The issue put simply: how do you finance a co-operative?
My buyer clients always come to me and say, “I found a condo that’s too good to be true! It’s in Rosedale, and it’s 1,600 square feet for $499,000! It seems too good to be true!”
Well, that’s because, it generally is.
Many buyers and other participants in the real estate market are aware that co-ops require massive down payments, usually a minimum of 30%. But if you don’t know, and you’re hearing this for the first time, then you’re probably in shock.
Consider that if you wanted to purchase a $500,000 condo, you could do so with 5% down, or as little as $25,000.
But that same $500,000 property, if it were a co-op, would require you to put down $150,000.
That’s quite the difference, wouldn’t you say? An “issue” for many buyers, no doubt about it.
In the case of many co-operatives in Toronto, the down payment could be even higher. 35% or 40% in this case would be $175,000 or $200,000.
That’s absolutely insane, in the context of today’s Toronto condo market.
But what many people don’t know about co-operatives, even if they do know about the down payment, is how the rest of purchase price is financed.
If it wasn’t expensive enough already – to come up with a 30-40% down payment, consider that financing the remainder of the purchase price is even more costly.
For the most part, banks will NOT lend on co-operatives. I’m sure there are exceptions to the rule, but my mortgage broker works with fifty-seven different lenders – comprised of banks, monolines, and credit unions, and not a single one will finance a co-op.
That is probably my answer to the question “What’s the deal with co-ops?” And I might put it ahead of the little nugget, “You need minimum 30% down.”
So you’re now asking, “If lenders won’t lend, where do you get money?”
Good question, and the answer is daunting.
Case in point: what are private lenders charging these days?
10%?
12%?
15%?
I know those numbers sound ludicrous, when you consider that a 5-year, fixed-rate mortgage is currently hovering around 2.94%.
But if rates for commercial properties are around 3.85%, and if Alt-A lenders are charging 5-6%, then it seems to reason that private lenders are going to be charging more.
Way more.
I spoke to a private lender this week who would require 12 3/4% interest on a 65% LTV for a co-op.
Does that sound like something that interests you?
Believe it or not, this is the way most co-operatives are financed, unless the co-operative has their own in-house lender who is familiar with the property, and has lent on it before. But even then, you’re not getting 2.94%, since that is a fixed-rate, five-year mortgage.
And we all know that you can’t put a mortgage on a co-op, right?
If you clicked on the link above, and read the blog from 2010, you’ll understand that there is no legal title to a co-operative. There is no deed.
The resident, or occupant, of a unit in a co-operative does not own that unit, but rather has exclusive use to live there. The resident owns shares in the entire co-operative.
So if the resident doesn’t own the unit, and there is no title, then why would a bank lend?
What would the bank use to secure the loan against?
These are rhetorical questions, and it’s why conventional lenders won’t lend on co-ops.
In the event of a default on a loan, a bank can foreclose on a house or condo. But in the case of a co-op, where there is no title, the bank can’t foreclose. There is no asset to secure the loan against!
This is a bit of a circular story, but by now, you should understand the “issue” with co-ops.
They require a crazy down payment, are very difficult to finance, and thus the prices are extremely low when compared to that of a similar property of condominium ownership.
It seems to reason that a 1,600 square foot condominium, would cost $800,000, whereas it might cost $400,000 for a 1,600 square foot co-op.
Even then, the potential buyer has to decide whether the potential cost savings is worth the higher down payment, and higher interest rate on the loan.
Why might a potential buyer be attracted to a co-operative setup?
I’ve asked around, and it seems the idea of being “self-managed” is an asset to some people. Regular readers of my blog know how often I tell horror stories about property managers of downtown Toronto condos, and how the concierge/security firms (hired by the property managers…) treat the residents. Perhaps being self-managed is an asset, as is being self-governed, and having more control.
Personally, I hate the idea.
My life is busy enough without having to constantly meet with other residents of my building to decide if we should buy another green bin, let alone approving every single purchase, sale, and lease of a unit in the building.
But co-operatives do sell, and there has to be a good reason for it.
Point of clarification here: I have never sold a co-operative in over ten years in the business.
In fact, I don’t know if I’ve ever showed one to a client.
The target demographic, in my mind, would have to be downsizers and retirees, who have cashed out of their homes, can purchase the co-op in cash, and who love the idea of paying less than HALF of what it would cost for the same space in a condo.
Other than that, respectfully, I have no idea why anybody else would consider it.
Can’t you find better things to do with your money than make a 35% down payment, and pay at least double the going rate of interest?
Correct me if I’m wrong…
Elizabeth
at 7:50 am
Wow. I didn’t know half of these things about co-ops. Thanks for the blog. Curious with all the drawbacks, why are co-ops so popular in cities like New York? Different finance rules?
Mike
at 1:33 pm
You see them in higher-end neighborhoods in both Toronto and New York, though they do get a lot of attention in New York because they were a popular form of ownership when New York started going vertical. There are downsides to owning one as mentioned in this article but the article is comparing apples to oranges. Yes, if you all you can afford is a $500,000 condo and you’re going to finance that purchase then there is no way you want a co-op. But if you’re established, maybe downsizing, then a co-op is the way to go.
The key advantage of a co-op is a neighborhood of ‘like minded people’. You choose your neighbors. We’ve all heard stories about the ‘neighbour from hell’ or that the person upstairs rents their unit via airbnb. Not the case with a co-op because you’ve pre-approved the purchaser.
Chroscklh
at 2:06 pm
The Co-op still outnumber the condo in NY by like 3:1, but all new building is condo. They say this why NY housing no crash like rest of America (one reason) – because co-op board have strict policy on people who live. I live in Manhattan for 2 year, I try to buy the small co-op -they make me show financials, have interviews, references. I jump through all hoop – I show financial record back home, come with translater. Old lady say “Excuse me Mr. Cvaladaderozki, what were you spending 81 billion dollars a month on?!” I say “lady, is in Kuzo, that’s 45$ US, that cell phone bill.” I satisfy everything, go to meeting, they meet Chroscklh, all of sudden remember “Oh Sorry, building no allow pet bear – rigid policy.” I disgust. I no want live anyway. I say “Old lady you put Uppity in Upper East Side.”
m m
at 2:58 pm
There are also co-ownerships, which are different than co-ops. Some of them have converted to condo corporations. I owned a co-ownership in Forest Hill, it was a bargain. The financing question is a bit silly. Banks do not fund co-ops or co-ownerships, but major credit unions willingly do so, at regular interest rates. There are lenders and lawyers that understand how to deal with co-ops and co-ownerships. Yes, the down payment is high, but that is the collateral that the lender wants to see. If the buyer has the cash, they can find very affordable units in quiet, well-maintained, older, buildings, in higher-end neighbourhoods.
There is a website that lists the differences in a table format somewhere online.
Co-owner
at 12:09 pm
David I think you commentary regarding co-ops and co-ownerships is one sided and it’s a lot of commentary for someone who has never dealt with these types of properties as you said so yourself.
Some points as to why a co-ownership is a worthy investment (for the right person)
1. substantially lower property taxes per square foot, included as a part of the maintenance fee
2. lower maintenance fees overall, less administration
3. lower building turnover, less wear and tear, fewer renters, fewer absentee landlords
4. credit unions are happy to mortgage these units with very competitive rates
5. 30% down means no mortgage insurance premiums (buying a property with 5% down is a bad idea anyways)
6. prime locations, amazing value per square foot
7. if your building goes condo you’re talking about a huge windfall.
Some suggest New York started and stuck with the co-op model because it was an easy way to discriminate (keep buildings white, visible minorities etc)
Our building is merely interested in financial viability and ability to pay maintenance fees and property taxes.
Co-owner
at 12:09 pm
David I think you commentary regarding co-ops and co-ownerships is one sided and it’s a lot of commentary for someone who has never dealt with these types of properties as you said so yourself.
Some points as to why a co-ownership is a worthy investment (for the right person)
1. substantially lower property taxes per square foot, included as a part of the maintenance fee
2. lower maintenance fees overall, less administration
3. lower building turnover, less wear and tear, fewer renters, fewer absentee landlords
4. credit unions are happy to mortgage these units with very competitive rates
5. 30% down means no mortgage insurance premiums (buying a property with 5% down is a bad idea anyways)
6. prime locations, amazing value per square foot
7. if your building goes condo you’re talking about a huge windfall.
Some suggest New York started and stuck with the co-op model because it was an easy way to discriminate (keep buildings white, visible minorities etc)
Our building is merely interested in financial viability and ability to pay maintenance fees and property taxes.
paul
at 12:50 pm
I like the idea and have been looking but couldn’t afford one with 30% down
Rentals buildings cannot go “GO Condo” in Toronto and I think in the rest of the GTA.
It was stopped by the government because good rental apartments, especially the ones built in the 50’s to late 60’s with the huge floor space (that would put most modern condos to shame), were being turned into condos and was driving the vacancy rate into a point of crisis.
there as a rush to turn buildings into condos in the late 80’s early 90’s. As a young teenager at the time a friends family lost their apartment because their apartment building was being converted and the had to buy or leave. Since they were only in the country for about 6 years they didn’t have the money
Buying a Co-Op
at 12:28 pm
I am currently purchasing a co-op apartment. Several credit unions in Toronto will finance a co-op purchase at 0.5% above the banks’ rate for a 5-year fixed rate. Estonian CU will accept 20 % down for some properties. The CU provides a loan to purchase shares in the co-op, so the asset to secure the loan is the shares. Everyone in the co-op owns a percentage of the entire property and building.
co-ownership potential
at 11:28 pm
Thanks everybody for the comments. Very helpful!
I’m having a dilemma: either co-ops/owners or townhouse for investment. In term of cash flow, the winner so far is co-op.
New Co-Owner
at 2:38 pm
All of Co-Owner’s previous comments are true. Your article is unfairly biased against co-ownerships, which is sad considering this is an amazing ownership option in a city where ownership is increasingly out of reach for a lot of people.
We recently purchased a co-ownership in one of Toronto’s best neighborhoods. It was the BEST decision we could have made in Toronto’s market. We had a sizeable down-payment but were unable to find a home within the city that we could purchase and afford renovations whilst not stretching our finances above our means – we did not want to be house poor. After exhaustive searches we stumbled upon a listing for a co-ownership downtown in a neighborhood where we could have never dreamed of owning a home. We jumped at the opportunity and navigated our way fairly easily into ownership with a very competitive rate from the credit union.
True – we had a few extra hurdles to jump during the process but no more than couples who are out-bid 6 or 7 times during the buying process.
In the end we have our affordable 2 bedroom ‘condo-alternative’, snug in the bustling heart of one of Toronto’s greatest neighborhoods, with great neighbors and the extra cash to continue to travel, eat out and enjoy the city we live in.
lana
at 12:09 pm
Comment on whether or not to buy green bin good at least in a co op you are well are of where your fees are being spent…living for half the amount you would spend else where…with coops its a community that work together for a common goal for the betterment of our building and homes..we do have a say voted by all as shareholders who live here and who does not..no choices elsewhere of that nature…best thing i ever did…maintaining making decisions as a whole is great..if ones lifestyle is too busy to be involved co op living is not for them..as for the real estate agent there are lenders available…id rather live mortgage free and money to do other things…being flexible in decision making for others funds should not be your decision but up to the individual…should be more of them..you own shares when you sell your unit your money is your own….not one dollar is given to the coop..its an investment like anything else its people helping people… For better living standards!
Bill
at 11:54 am
I lived in a co-ownership for 5yrs, the only reason we sold is that the relationship I was in ended. There is no place in Toronto I could have lived on the top floor of a building in a 2,300sf unit with a private 900sf terrace for the price we paid.
Buying a co-ownership sounds scary, besides a little more paperwork it was much like buying a condo. Living in a co-ownership works and felt like just living in a condo building.
If you go the way of a co-ownership, find an agent who has bought or sold one and find a Lawyer who has also been involved in a co-ownership, its easy to find one.
Would I do it again for the right unit?, Yes without question.
Michelle Powell
at 6:46 pm
Hi David: I am an agent with Right at Home Realty who has bought and sold co-ops and co-ownerships. As you said, these units are great for people who are wishing to let go of all the work involved in owning a house but don’t want to be squeezed into a new condo: people who are not just starting out on the property ladder with a view towards increasing their net worth through real estate. I generally do not necessarily recommend them to younger people just starting out. I think, like you, that from a purely financial point of view there are better choices available.
There are, however, circumstances where I do and have recommended younger buyers purchasing one of these units. One example which comes immediately to mind is a divorcing couple with children. I have dealt with clients who, together, were able to settle their children in a neighbourhood with an excellent school for their children, but, through divorce, simply cannot afford to live in these neighbourhoods anymore. Since, as you mentioned, these homes are much larger and in more established areas, they can be an excellent choice for these clients because they cost much less and allow the children to attend excellent schools in excellent neighbourhoods.
Jason
at 5:49 pm
The reason why realtor will never understand co-ops is underscored by your statement, “…just starting out on the property ladder”. See, those of us that have purchased co-ops are not so much interested in turning a quick buck and increasing net worth, as much as finding an affordable, long-term place to live in a nice neighbourhood.
Phyl Corcione
at 7:39 pm
I purchased a co op in Hamilton in 2014. Please read my letter below and see if you can give me any advise.
I did contact Humans Rights Tribunal and are starting to deal with the issue at hand. The Co,op have retained a lawyer to respond to my complaint.
I had been in an abusive (narcissistic) marriage for 12 years which that put me into depression and extreme anxiety. During my marriage I was put on anti depressants by my family physician Angela Mazza-Whalen.
I finally had the courage to leave the marriage in July 2012. My depression continued as did my anxiety. I have been seeing my therapist Anne Shaw on a regular basis and she put me on a stronger dose of antidepressants and anxiety med.
My daughter who is a psychiatric R.N. suggested that I get a dog, which are known to help treat depression and anxiety.
I was not sure about getting a dog so I just carried on feeling horrible.
The following year Sept. 5, 2013 my only son at the age of 35 years old, passed away suddenly of a massive heart attack.
My world ended that day. My depression got worse as did my anxiety. I could not get out of bed nor did I want to.
In February of t 2014 I decided to go to a breeder and visit a small breed of dogs (Maltese/Shiztu I decided then and there that I would get a puppy and see how I felt.
I can honestly say that it was almost immediate that I felt better. As time grew on I was feeling happy again, my anxiety and depression lessened and my med were decreased.
Due to financial reasons because of my breakup I had to sell my home and purchase a co-op. Which reduced my cost of living by half. (being self employed I have no pension, except for CPP and old age). I purchased a Co-op apartment and moved in October 31, 2014.
I am friends with the President of the co-op and have other friends living there.
I was told I could not have a dog living there.
The president Sheila Stacy had no problem with me keeping the dog, but the other condo owners said no and I was told I was not allow to have a dog. The by-laws states no pets.
I had no choice, I needed to live there so I gave my dog to my son in laws father to take care of him while I try and see if I could talk to the board and members to convince them that I need my dog for my mental well being.
Nothing was done about it. I was devastated and my depression and anxiety increased, once again. The depression returned full blown, I couldn’t stop crying, I didn’t want to work or get out of bed. I couldn’t take it any longer my depression and anxiety did not subside and my meds were increased again. I was desperate to have my dog, so in mid Feb 2015, I brought the dog to my apartment. I snuck him in and used the back stairwell so no one would find out. Those two weeks were wonderful and I felt good, but terrified they would find out.
My dog never barks, is hypo allergenic, is trained to go outside when he needs to go go to the potty and is only ten pounds. No one ever heard him for those two weeks, they had no clue, I took him out for walks early in the morning and evenings I even take him to work with me, all was well until someone saw me bring the dog into the building. I was told by the president I could not keep the dog due to the other residents complaining.
The residence said that if they catch me bringing the dog into the building that they would fine me $1000.00. The women that lives next door to me went as far as saying she would sit outside her door and wait to see if I brought the dog in!!
The president Sheila Stacy and some other residence had no problem with me keeping my dog stay with me, they all knew about my health issues and how I needed my dog to cope.
One residence who lives on my floor saw him with me and fell in love with my dog and offered to babysit him whenever needed, she is 90 years old and also would love a dog but knows she is not able to take care of a dog on a daily basis ie: walks. (by the way that neighbour never told anyone I had a dog in my apartment!)
At the end of February. I had to return my dog back to my son in laws father or sell my condo.
I asked my therapist if she could give me a letter stating how my dog is a therapy dog and helps me tremendously with the depression and anxiety. Dr. Shaw was more than happy to oblige. I then asked my lawyer for a letter stating my rights, which he also obliged.
I did produce to them my letters from the Dr. Shaw my therapist and my lawyer Charles Macaluso to Sheila Stacy around the beginning of March. In the end I was told that I could not have him live there and that I would be forced to sell my condo. I then produced another letter from my family doctor around the end of May at which point Sheila Stacy contacted her lawyer to see if I would win if it was brought to court and she was told that I would lose the case. I did not see anything in writing.
I was devastated, cried everyday and went into a deeper depression and my anxiety increased. I returned to my therapist who had to increase my medication.
The meds do help somewhat but I cry everyday and do not want to get out of bed, some days I take more anxiety meds and just go back to bed and sleep.
I need my dog desperately I need him for my well being and my mental health. I can’t afford to move, I need to live here. I want to feel happy again! I can’t afford to be ill, I need to work to support myself, but when I the depression hits me I struggle everyday.
I hope you can help me I just want be well and off medication, having my dog live with me is the only thing that can accomplish that.
Bob
at 10:34 pm
I’m sorry for your circumstances but I cannot understand why you took the risk to move into this building when you were told no dogs from the beginning. I could never have taken the chance of not being with my dog. I would find another place to live and get your life back on track again. Good luck.
Linda
at 4:32 pm
My son was quickly able to find financing at DUCA credit union, which was the first place he applied to.
Michael Bay
at 2:44 pm
My goodness, what a collection of misinformation. Coop financing is available from several lending institutions in Canada, including DUCA at very attractive rates not much different from what you would pay on a condo. You may be required to provide a down payment a bit higher than for a condo but not much. The ownership mode is different from that of a condo but, at the end of the day, it amounts to the same thing because you have exclusive use of your unit. In fact, coops, not condos, are the rule in New York City and other places and the sky has not fallen as a result. Why the scare mongering?
John
at 10:37 pm
I bought a coop around 10 years ago and am very happy with my decision. I live in a great part of town, in a spacious unit, at a price that is considerably cheaper than non coops in the area.
Admittedly, there are some “negatives” depending on your perspective (e.g., large down payment, more limited finance options, interview screening process, no renting it out, etc.). However, these factors are what I like about coops as you tend to get higher quality long term residents. In a non coop situation, almost anyone with a pulse who can get in, particularly troublesome renters if the buyer is an investor. If you want an investment property to rent your unit out, a coop definitely won’t be for you.
In summary, coops will be suitable or non suitable depending on what qualities are important for you in a residence.
Saurabh Garg
at 7:11 pm
Hi there,
I am a mortgage specialist working with DUCA credit union and we finance co-op and co-ownership buildings. You are right in saying that we need 30% down payment tho.
Thanks,
Saurabh Garg