There are a few different ways to categorize housing co-ops, which generally relate to how they deal with their ownership structure and who they are intended to serve. This article is intended to give a quick overview of some of the more common models of housing co-op equity, and explain a bit about how they differ from one another.
Market Equity Co-ops
The different ways of dealing with ownership structure are usually related to how the equity in a house is treated, since this, for most housing co-ops, is by far the most financially valuable asset of the co-op. In a “Market Equity” co-op, a member joins the co-op, buys a share, and lives in a unit. This is similar to something like a condo complex, but instead of owning one condo, you own a share in the whole complex. When you decide to leave the co-op, you can sell your share at whatever the market will pay for it. The co-op sets policies which affect all members, and the cost for each member to live in the co-op depends mainly on when they bought a share, and at what price, as they would have a fairly traditional mortgage on their share of the co-op in their own name. This type of co-op is normally dealt with by the National Association of Housing Cooperatives.
Limited Equity Co-ops
In a “Limited Equity” co-op, the co-op and the member each have a stake in the equity of the property. When a member joins, they purchase a share in the co-op in order to move in, just like in a Market Equity co-op. As the value of the share changes, though, there is a relationship between the co-op and the member for ho this change in value is divided. One example might be that 25% of the change in the value goes to the member, and 75% goes to the co-op. The idea behind this is that by diverting some of the value to the co-op, housing prices can be kept affordable by the co-op, which has access to some of the equity in the building. A second major reason for the split of the value is to give members in the co-op less of a financial incentive to sell with the market, so that a spike in housing values does not cause a wave of sales, followed by much higher costs to live in the co-op. Limited Equity co-ops are often used to provide affordable housing, while allowing members to build some wealth with the increase in the value of the property. While NASCO has worked with a few Limited Equity co-ops, the National Association of Housing Cooperatives has dealt with Limited Equity co-ops in more detail.
Group Equity Co-ops
Most of the groups that NASCO works with use the “Group Equity” co-op model, where the assets of the co-op are owned by the group as a whole. In a group equity co-op, members either pay a deposit to move in, as one would in a rental apartment, or else they pay a “share”, but in these cases the price of the share is roughly the same as a deposit on a similar space, as opposed to the actual cost of, say, 10% of the value of the co-op. In either case, when the member moves out, they typically do not profit from their time in the co-op, but get their deposit or share returned minus any charges made to this money. This means that the cost to get into a Group Equity co-op is generally much lower than the cost of other types of co-op.
The Group Equity model came out of the student cooperatives, but has been adopted by non-student co-ops in recent years because of the low cost to get into the co-op. Group Equity cooperatives tend to be better than other types of housing co-ops at making sure that the co-op stays affordable for future members - and that the co-op perpetually operates as a cooperative. The reason for this is that as the co-op develops assets, those assets go to the co-op, not returned to the members as cash. Because the co-op is able to hold onto this value as it grows, a Group Equity co-op is better able to fund its own growth, and build an economy of scale quickly. It is also able to resist the need to raise rents, because of the financial stability in the co-op.
While Group Equity co-ops have been very successful in specific markets, such as in university towns, they still represent a tiny fraction of the total co-op population, and the non-student group equity co-ops are a tiny fraction of that fraction. In total, Group Equity co-ops make up less than 1% of the housing co-ops in the US.
Originally, the Group Equity model came out of student co-ops because at the time, students were one of the few groups in society not concerned with building equity through the purchase of property. For similar reasons, many Senior Retirement Cooperatives used this same model, because the members were at a stage in their life when they were not concerned about personally profiting from the value of their housing. As the housing market changes, more young people are looking at alternatives to the traditional path of buying a first home while young. A Group Equity co-op allows people to live affordably while giving them the flexibility that people increasingly want from their housing.
Keep in mind that all co-ops are different —and take everything you see, hear, read, and experience with a grain of salt. Knowing which aspects of other housing cooperatives make sense to the group is useful during the process of creating a set of shared goals and system of operations. Members can learn about housing cooperatives via fellow organizers, road trips, and educational conferences. There may be a co-op alumni in the group, who can provide valuable information but should not be relied upon as the only source of knowledge. Group road trips to other housing cooperatives are fun and provide an opportunity for members to get to know each other better. Most co-ops, in the spirit of the movement, are quite willing to host guests overnight, but plans should be made in advance. Road trips provide organizers with flavor for what others have done. The annual NASCO Institute and regional conferences organized by local cooperatives are unique opportunities to meet cooperators, discuss strategies, learn about new ideas, and energize the group.