Due to the nature of this subject, we will use a little more technical jargon than we have in most other articles. We will try to keep it clear.
If you have never come across a coop property before you probably live in an area of the country where these types of properties do not exist and you can skip this article completely. On the other hand, if you live in New York City or in the New York metro area, you should pay attention because coops dominate the real estate market there.
Cooperative is a type of property where you you own shares of a corporation, typically a not-for-profit corporation.
When you borrow money to buy any other type of property, the lender’s security is a lien against that property. You can get more details on how lien’s works here. Since a coop is not defined as a “real” property, there is no mechanism for a lender to record a lien against it. Instead, a lender will keep the original stock certificate for the coop and a buyer will only receive it once the loan is paid off. See Wikipedia’s definition of real property here. Due to this higher risk, you will find that many banks do not finance coops at all.
Similar to condominium financing, a bank will check the financial strength of the coop, it’s insurance coverage, and whether there is any litigation associated with the property. Though all of this may seem like unnecessary extra hassle, the reality is that the bank is helping you do your due diligence, as you would not want to buy shares of a corporation that is not financially sound.
One of the key documents specific to coop ownership is called a Proprietary Lease. It is an agreement between a shareholder (buyer) and a corporation (coop) defining the rights and obligations of each party. This document will contain a few rules that may place certain restriction on your apartment ownership.
Be prepared to go through an interview and a screening process conducted by a coop board. Even though every coop has it’s set of financial requirements (income level, savings, and other asset requirements), ultimately the board’s decision to approve you is a highly subjective one.