The Pros and Cons of Buying a Co-op Property

Edward Trapunski
by Edward Trapunski February 22, 2016 / No Comments

When people think about co-op housing, the first thing that comes to mind might be those back-to-the land hippie communes. Co-op housing has changed a lot since those days although the people might be the same.

Co-ops are especially appealing for older homeowners. Financing can be a challenge so if you’ve sold one property and you have enough cash on hand, a co-op offers a real financial advantage.

According to the Co-operative Housing Federation of Toronto, there are 17,000 co-op units in Toronto and York Region. Many co-ops are multi-unit buildings—medium-sized apartment buildings or townhouses—somewhat similar to condominiums but different.

Like a condo, a co-op is run by a board of directors elected by the members to keep the place well-managed and in good shape. In a condo, you own your unit and the rest of the development is common property. In a co-op, you own a share of everything but no equity, which makes it harder to get a mortgage. Condos are classified as real property, which means that buyers own deeds to their dwellings and can be used as collateral against the loan.

When you buy into a co-op, you become a shareholder in a corporation that owns the property and you’re entitled to the exclusive use of one unit in that property.

To purchase shares in a co-op you can take out a share loan in lieu of a mortgage and the share—rather than the actual property—becomes the collateral. These loans operate similar to a mortgage but because of the legal nature of ownership in a co-op, it makes it harder for lenders to foreclose in the event of default. While share loans are harder to come by than conventional mortgages, they are available. Because of their own membership structures, credit unions are usually good sources of financing for co-op buyers.

Generally, a co-op building will never be sold or flipped and co-op members aren’t asked to leave unless they break the co-op’s by-laws. So members can feel secure that they can put down roots for a long time. If you move, the share is returned to the co-op to be offered to the next person who wants to be a member.

Co-ops can be more restrictive than other housing options when it comes to ownership requirements. Where co-ops are not subsidized, buyers may be required to have a specific net worth or debt-to-income ratio to demonstrate the ability to meet the ongoing financial obligations of maintenance and upkeep. Most units forbid subleasing.

Some co-ops have a particular membership focus. Arcadia Court Housing Co-operative in Toronto, for example, is for people working in the arts and their families.

Co-op buying and living

When their two children left the nest, Nancy and Jackie Young were looking for a somewhat smaller version of their well-appointed house on one of the nicest streets in the Summerhill neighbourhood of Toronto. They didn’t want to give up the good location and vibrant lifestyle of the area.

They took their time, enjoying three years of visiting open houses as well as checking out condos and townhouses. They felt the condos they visited were an interim stop for some of the residents, and Nancy and Jackie didn’t want new neighbours every few years.

Then they fell in love with the Arbour Glen, an older established co-op building with character and heritage overlooking Rosedale Valley Road. It was the first major apartment building designed and developed in 1956 by Isadore Sharp, who later founded Four Seasons Hotels and Resorts.

They were able to pay cash for the unit, but they wanted a two-week bridge loan to finance some renovations. At first the bank, their long-time lender, agreed to advance the credit. When the bank discovered the loan was for a co-op, it backed out. When the banks wouldn’t help, the Youngs turned to a small credit union delighted to have their business.

“It is working out extremely well,” Jackie says. “I like to say that we live in a village.”

David Groskind’s real estate agent showed him a number of buildings in the affluent Forest Hill neighbourhood of Toronto. When she took him to a building at Avenue Road and St. Clair, the price was right but it was a co-op. It had restrictions that condos didn’t typically have. He wasn’t allowed to rent out the unit, a right that makes some condos attractive to buyers. But that made no difference to Groskind, who intended to live there.

Luckily for him, he had sold his house and had more than enough money to pay in full for the unit. Groskind soon realized that it was almost impossible for him to get a conventional mortgage. He was only able to find one lender willing to provide credit for co-ops like his, but the company would finance just one-third of the value of the property.

Because only a limited number of people are prepared to pay cash on the spot, there wasn’t a bidding war. Groskind paid $480,000 for the same amount of space that would’ve cost more than $700,000 in a conventional condo in that neighbourhood.

Even if you can afford it, it’s not easy to get into his building. Potential buyers are scrutinized very closely to make sure they fit into the community and live a relatively sedate lifestyle.

“The people who built it expected Forest Hill people to want to live there and designed it for the standard of the neighbourhood,” Groskind says. “The building is filled with people of retirement age like me who sold their house and bought this place probably for the same reason I did—that it was relatively inexpensive.”

Like the co-ops Groskind and the Youngs inhabit, co-ops tend to be smaller buildings in prime locations with low turnover and a more mature population. While there’s more complexity in buying and owning a co-op, the value and stability can help compensate for the inconvenience.

Flickr: NoJets T.O.

categories: Mortgages