Limited Equity vs. Market Rate Co-ops

When people think about a co-op living, they have visions of stately old buildings with an impressive-sounding name like El Dorado or Dakota or River House, where billionaires and celebrities live.  And yes, that is one small part of the 1.2 million apartments in the co-op real estate marketplace. Those high-end buildings all fall into the market rate co-op category, along with many other less lofty and expensive ones, but you may not even know that there is also another category, the so-called limited or zero equity co-ops.

Below is a brief explanation of the differences between these two types of co-ops. For a much more in-depth look at the differences check out this  report from the National Association of Housing Co-operatives.

Limited or Zero Equity Co-ops

You may have recently turned green with envy while reading an article in the New York Times about the lucky few who own truly bargain-priced co-ops.  There was the Upper West Side studio bought for $30,000 in 2012 and the $12,000 Lower East Side one bedroom, bought for one lucky young woman by her parents 20 years ago. These apartments were in limited equity co-op buildings.

These type of super low-cost co-ops make up about one third of the total co-op marketplace. To get one of them you need to meet strict income limitations (in some cases earn no more than 80% of the average median income for the area) and patiently wait years until your name comes up on the waitlist.  For example, many of the so-called Mitchell-Lama buildings in New York City have waitlists that open to new applicants very rarely, and when they do, they use a lottery to accept new people on the list. So, unless your far-sighted parents put your name on a waitlist years ago, you have to literally win the lottery to get on one. Even then it can take 10 years or more for your name to come up, at which point you can buy your bargain co-op, as long as you still meet the income guidelines. For those of you who are eternal optimists, here is a link to the Mitchell-Lama waitlist rules.

There is another catch with the limited equity co-ops.  When you sell, your gain is limited by a formula established in the co-op’s rules and regulations.  You may have to sell your co-op at a price not much more than what you paid for it, and you have to find a buyer who meets the building’s income guidelines.

Why would you then tie up your money for years, with little return on your investment, in order to live in one of these co-ops?  You do it because you typically get a much nicer, better maintained and more stable building at a lower cost than a rental apartment in a similar area.  If your income makes it tough to find an affordable market rate co-op, it is well worth your while to find out what types of limited or zero equity co-ops are available in your market, because getting one of them is the ultimate co-op prize.

Market Rate Co-ops

The other co-op category is market rate co-ops.  They make up about two thirds of all the units.  These co-ops are typically directed at middle and high income buyers and are sold at the prevailing market price. While the limited equity co-op prices change little over time, market rate co-op prices can fluctuate wildly, depending on the overall housing market conditions and interest rates. As a result, just as when buying a single family house, significant gains or losses are possible when you sell.

Many of the market rate co-ops were converted by for-profit developers from rental buildings. In a conversion, the building’s tenants are typically offered a chance to buy their unit at a discounted price. If they choose not to buy, they can stay on as renters, or the developer may offer them money to give up their lease.  While getting a below-market co-op is a sweet deal, the downside is that buying in a newly-converted building you may have difficulty getting a loan because many lenders are reluctant to make loans in a building with a large proportion of rental units.

Some market rate co-ops collect a so-called flip tax on the sale of a unit.  This tax, payable by the seller, typically ranges between 1% and 3%. Buildings that charge flip taxes often use them to increase their reserve fund, which will benefit those living in the building but can make it harder to sell the apartments in the building.

In a newly-converted co-op, the sponsoring developer often keeps a number of units and sells them as so-called sponsor units.  These apartments are very desirable because you can buy and sell them without board approval, and sublet them without board approval.