Co-ops can be a strategic way to purchase a great piece of property for a substantial discount. At first glance, the premise behind a co-op may seem rather intimidating and confusing. However, after fully understanding the terms and conditions, certain co-ops prove to be fantastic deals.

Lisa Smith of Investopedia explains that, “Co-ops are not considered real property. When you buy into a co-op, you become a shareholder in a corporation that owns the property. As a shareholder, you are entitled to exclusive use of a housing unit in the property.”

This translates into the following:

1. Purchasers of co-ops receive shares instead of deeds.

  • Once you purchase a co-op you will receive a proportional number of shares in a corporation in place of a deed.
  • The number of shares you obtain depends on the size of the unit in proportion to the size of the building. This grants a stake in the corporation and constitutes the use of the purchased unit.

2. Maintenance fees are paid based on a pro-rata share of ownership interest.

  • This means you only pay maintenance fees based on the number of shares you own. Most condo associations base maintenance on total bedrooms in the unit.
  • The difference is not all 2-bedroom units are always the same square footage. Paying maintenance fees based on the number of shares owned may provide an advantage.
  • Let’s say you own a three-bedroom unit that is smaller than other three-bedroom units in the building. In a co-op this means that you will pay a smaller maintenance fee than those other two-bedroom units. In a condo building, you may be stuck paying the same fees as those larger two-bedroom units.

Now the interesting part of the deal comes in if the property is a land-lease co-op. Basically this means the land that the building sits on is not owned; it is leased. Standard land-leases are 99 years. At the expiration of the land-lease, the owner of the land may take ownership of the building and all of its corresponding units. Now at first this may seem shocking and deter investment into a co-op. However, with a land-lease co-op, scenarios may occur:

1.The land-lease expires.

  • As previously mentioned, if the land-lease continues through expiration then the landowner takes possession of all structures built on the land. Ultimately, shareholders in the co-op may lose their interests if the landowner is unwilling to negotiate.

2.The land-lease gets renewed.

  • If the landowner renews the lease, shareholders in the co-op have more time to enjoy the full use of their units. This also promotes property values, as there is still life in the lease.

3.The land is purchased.

  • Now this is the most interesting and profitable scenario. If the shareholders of the co-op come to an agreement among themselves and the landowner to purchase the land, all properties in the building will be deeded as real property.
  • Property values will skyrocket to prices of comparable condo units in the area. Sometimes this appreciation can amount to over twice the previous co-op value. This substantiates to an impressive return on investment for all existing shareholders turned property owners.
  • The building and the land are both owned and the co-op converts to a condominium. Possession of the real estate is granted to the titleholder.

A great investment opportunity occurs when the third scenario is executed. This scenario allows individuals to buy-in when the price is reflective of the co-op status, but allows them to reap the financial and housing benefits once the land is purchased and the unit prices appreciate accordingly.

To see a real-life example of the third scenario, click HERE.

For more information about land-lease co-op investments or any real estate services, feel free to contact Richie at info@richiegallione.com or (954) 825-3758.