Buying a Co-Op in Chicago may be foreign to many buyers and even Realtors. In the city of Chicago co-ops are rare in comparison to a city like New York where they make up the majority of city ownership. So what is a co-op and how does it differ from a condo? Why are co-op assessments so high?
First we need to understand what a condo is. Condominium ownership is typically considered “fee simple.” I won’t bore you with too many legal details but the quick and easy explanation is that when you buy a condo you have a deed that declares condo “X” as yours. You own condo X and have a percentage of ownership in everything outside of condo X, which are known as common areas. Lets say you live in a 100 unit condo building and lets pretend each condo has the same exact value. Therefore if you own Condo #20 you will then have 1% ownership in the common areas. Your assessment will be based off this 1% ownership, so on and so forth. When you own a condo you have a condo association which manages the common space of the building, pays bills, takes care of maintenance, etc. They institute rules & regulations for the condo association as well. There is a board, there may even be a management company hired by the condo association.
Co-op ownership isn’t that much different but there are some key differences that must be noted. First, you don’t receive a deed. Instead, in a co-op, there is a corporation that owns the entire building. When you buy a unit in a co-op you are awarded a certain number of shares for the building. These shares entitle you to live and use a certain unit in the building, lets say unit 10D. These shares authorize you to live in 10D, remodel 10D, do what you want with 10D…even sell 10D. Your monthly assessment for 10D will be higher than a typical condo for several reasons. First reason is that there may still be a mortgage on the building and part of your assessment is going to pay that mortgage. Next is that your assessment will typically include your real estate taxes. Since there are not individual pin numbers in a co-op there are not individual tax bills. Instead your tax liability is determined by the amount of shares that you own. Assessments in co-ops are also higher because these buildings typically have very high levels of service.
Lastly it is important to know that when buying into a co-op you are entering into a corporation. You must submit an application to the board, you must submit your financials, etc. The board does have the right to deny your purchase and yes it is perfectly legal for them to do so (as long as they are not discriminating). Why would the board deny someone? Well there are different reasons but the largest reason is due to financials. The board is primarily interested in the health and well being of the building and they want to make sure that you have the ability to afford the condo your buying. They want to make sure that your financial health is such that if a capital project must take place and assessments increased that you will not be financially strained.
Co-ops are typically more difficult to finance. You will always need 20% down and in some cases 25% down. Some co-ops require you to have a X amount of cash on hand. Each co-op will vary, some require 1 years of assessments in cash or liquid assets.
Should you avoid co-ops? Absolutely not. Co-op living is a different style of ownership but does provide its own level of benefits both in the financial security of the building to the services you can receive on a day to day basis. What is important is that you understand what you can afford and where you feel comfortable.