If you look at Seattle housing like a restaurant menu, there is a wide selection of home types to choose from.
On the left side of the menu, you can find individual choices that satisfy many people. I’m thinking of the dozen or so types of single-family homes. They range from the basic single-floor rambler to traditional two-story homes, three-level townhouses and manufactured homes. That’s a great selection.
The right side of the housing menu includes the chef’s specials. These homes are bigger and more community oriented. They include gated developments consisting of detached houses or townhomes run by a homeowners association, mid- and high-rise condo buildings and tri- and four-plex structures.
And then there are cooperatives – arguably the least-known form of homeownership on this menu of options. Well, it’s not exactly a home and “ownership” is a bit misleading too. Let me explain.
Cooperatives are all around us – credit unions, insurance companies and consumer entities. Outdoor-gear retailer REI is a local example; its website put it well, writing a cooperative “allows us to focus on shared values, not share value.”
In a housing cooperative, or co-op, ownership of the property is vested in a corporation. Residents purchase shares in the corporation rather than owning the home. The price of the shares is what you would see when the home is listed on the Northwest MLS and populated on real estate search sites.
The purchase entitles buyers an exclusive right to reside in a specific unit. Buyers do not hold title on the unit but have something resembling a stock certificate that provides them voting power on matters related to the building, usually one vote per residence, as opposed to voting power relative to the size of the unit (like for a condo).
Co-op owners are more like lessees. They are responsible for paying monthly dues – like a condo owner – and those so-called carrying charges cover all of the building’s operating expenses, including utilities, general upkeep, staff payroll (if applicable), taxes, mortgage (if there is one on the building), insurance, possibly other debt and/or emergency fund. Lessees treat the unit as personal property unlike real property in traditional home ownership.
For IRS purposes, the co-op member can deduct his/her shares of the taxes and interest charges – just like traditional homeowners – provided 80% of a cooperative’s income is derived from monthly charges. The stock certificate is usually freely assignable, but the proprietary lease typically has severe restrictions on its assignability and details would be included in the co-op bylaws.
There are unofficially 28 co-ops around Seattle, most on Capitol Hill or Queen Anne. They are among the oldest residential buildings in the city, including one dating back to 1906. The typical Seattle co-op was built as an apartment in 1930 – which means lead-based paint could be present – and comprises 30 units.
Excluding inside the homes, where owners can have many modern conveniences, few of these places are fancy. The buildings often include shared laundry facilities and hot water supply, and some are without elevators or parking. The biggest – and arguably one of the nicer buildings (“newly born” in 1961) – is Melrose Terrace, a 9-story, 110-unit structure on Cap Hill with several common-area amenities including a heated indoor pool. Like most co-ops, Melrose Terrace is 100% owner occupied and prohibits subletting.
What do people see in these buildings? (There was a hint in the last paragraph.) It’s often the community that comes from within – all owners (okay, lessees).
I like to think of co-ops as collectives, a group of people sharing common interests and goals. Some places are tight-knit communities where unit owners know one another by their first names. They can sometimes be highly social living environments, with book clubs, movie nights or weekly dinners. Some co-ops even require participation of its members – for example to manage trash/recycling pickup, landscaping or window cleaning. At the very least, owners are all bound to the economic mission of jointly paying toward the daily operation.
Co-ops can be divided into three categories. They include leasing (or zero-equity) cooperatives, in which the corporation leases the building from an investor rather than own it; limited equity, in which co-ops set restrictions on the price of shares bought and sold to ensure the building’s mortgage can benefit from below-market interest rates; and market rate. As the name suggests, market rate co-op homes allow member/owners to sell his/her shares on the open market.
Co-ops typically cost much less to lease/own since they operate simply to pay the bills and maintain the property, a favorable concept in an expensive city like Seattle. Of the 10 actively listed co-op units on the market in Seattle (in late April), a typical unit was 830 sq. ft. in size and priced at about $570 a square foot. The monthly carrying charges – or “maintenance fees,” as many co-op boards like to call them – on those actively listed units range from $282 to $1376, with an average figure of $652. Like condos, monthly co-op fees are typically based on the size of the unit.
Not bad, you say? In many cases, true. However, the owner doesn’t actually build equity (although the value of the unit will likely appreciate over time) and, therefore, he/she could not, for example, take out a home-equity loan. In addition, when a member fails to pay his/her portion of the monthly fees, all other shareholders must address the shortfall or possibly risk having the entire property foreclosed under the building’s blanket mortgage – a significant drawback to co-op ownership. To protect against this risk, many co-ops assess a monthly charge to set up a prepayment reserve fund to cover property taxes or other costs. (Failure to pay the monthly fee will probably not impact a person’s credit score since it’s not a traditional debt like a car payment.)
There is an application process for the proposed purchaser and it includes a background check, with references and in-person interviews (or possibly virtual meetings in a pandemic). Like condos, co-ops are heavy with bylaws to maintain security and oversight for its residents. Unlike condos, the rules include a vote from shareholders on each person wishing to join the cooperative. In many buildings, visitors residing longer than a month are also interviewed and a vote taken to approve or reject the stay.
The board overseeing the cooperative must follow the laws governed by the city, state and federal Fair Housing Act, which includes classes such as race, color, religion, sex, familial status, national origin or disability. Most co-ops have open membership without restriction, however it’s not a secret that some still use unusual selection processes when reviewing applicants.
While the interviewing members will have many questions of the applicants, so too should prospective buyers wanting to know more about the co-op. Some questions one might want to ask members include:
- How much are the building’s monthly carrying charges?
- What is the underlying mortgage?
- What is your pet policy?
- What is your subletting policy?
- What is the policy for making alterations to a unit?
- What are member duties to maintain the building?
- What types of activities do you hold?
Obtaining a loan to pay for shares in a co-op can be a little more challenging, too. Many financial institutions refuse to work with applicants because of the uniqueness of the housing arrangement. Remember: Buyers are not seeking a mortgage; it’s better known as a “share loan.” National Cooperative Bank and Caliber Home Loans work with co-op loan applicants, as well as some credit unions. (This is not an endorsement of any institution.) Applicants will also need to acquire homeowners insurance, a blanket policy that covers damage to the building, as well as insurance for personal belongings.
It’s wise to speak with a financial expert to check on the fiscal health of the co-op and a real estate attorney to review the documentation and confirm what papers are recorded by the county in a transaction before moving forward. More information can be found at the National Association of Housing Cooperatives.
As you can see, cooperative housing is a good fit for some – but not for others.