Shares in a co-op unaffected by the market

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Dear Real Estate Adviser,
I am a potential first-time homebuyer interested in a co-op located just a few blocks from where I work. Because a co-op is actually a stock purchase, I am concerned that buying one is riskier than a condo, given all the stock-market trouble. If there’s a stock market crash, wouldn’t the stock be affected? I’d hate to get wiped out and end up homeless!

Dear James,
Fret not. While you would be buying shares of a corporation that owns the co-op building, that corporation is not a publicly owned entity and thus is not subject to the turbulence of the stock market.

In a co-op, short for cooperative housing project, you aren’t purchasing a unit in a given housing complex as you would with a condominium. Rather, you are purchasing the above-mentioned shares that give you a proprietary lease in the building. It’s also known as a “membership.” The larger your living unit, the more shares you own in the corporation. Most co-op corporations, by the way, have not-for-profit structures. But as part of your share purchase, you will have a vote in the affairs of the co-op corporation.

Because you are technically buying shares of a corporation instead of actual real estate, you will likely need to request what’s called a “share loan” from your lender. A lender usually wants to see a minimum-occupancy figure in the co-op building exceeding 50 percent before they will make such a loan.

Every month, you would be paying an amount covering your lease, or “share,” to that lender, plus making a separate payment to the co-op covering your portion of the facility’s monthly operating expenses. Those expenses typically include the blanket mortgage payment on the property, maintenance, property tax, insurance, utilities and management fees, plus a preset contribution to the co-op’s reserve, or “rainy day” fund.

Make sure you clearly understand your financial obligations before buying into a cooperative. While you don’t accumulate equity in a co-op, most co-op corporations have a market-rate structure that allows you, with some minimum-stay restrictions, to sell your shares for what the market will bear. Realize, too, that co-op boards frown on subletting units more than condo boards. For more on the merits and differences of co-ops and condos, see a previous column.

So, no, the New York Stock Exchange can tank precipitously without wiping out your co-op shares and rendering you homeless. But realize that if real-estate values fall, so will the share value of your stake in the co-op.

Good luck with your new co-op home and enjoy that short walk to work.