Buying Co-Ops

by Mike Holman


I recently came across an article I’d read and enjoyed before on anoisette. Basically it’s a horror story of what can happen if you buy into the wrong co-op in Toronto.

When I first started hunting for my first condo, I kept coming across dirt cheap properties (they’d be in great areas, look wonderful and have a low price). I’d ask my agent why she wasn’t showing me these, and she kept saying “they’re co-ops, I never recommend clients buy in co-ops”. I was suspicious about this, and the main rationale she gave me against them is that it’s hard to get a mortgage, so you need to put down 35% (it is considered a different kind of non-mortgage loan).

The reason for this, as was explained to me, is that with a condo you own a deed to that space in that building. Because of this, you can borrow against the deed and get a mortgage, much as you would with a single family home. In the case of a co-op, you own a SHARE of the corporation, which entitles you to exclusive access to one of the units. When you borrow money to buy the place, you’re using this share as equity (much as you could use a stock share to borrow money or pawn your guitar).

I’m not totally sure why banks like condos but hate co-ops, but apparently there are more legal requirements about how a condo is run, and they have more options to foreclose. My agent kept telling me that I’d need lots of money for a down payment, and becuase any buyers would have the same problem, I’d have a tough time selling it down the road.

Since I was (and am) planning to hold the properties I buy for the long-term, the selling argument didn’t bother me. The massive down payment sucked, but I reasoned that if it’s tough for me to purchase, this is a “barrier to entry” that would make it tough for other people to purchase as well (and help me get a good deal).

One strategy I also considered was to offer a vendor-take-back mortgage if I ever wanted to sell, then I’d be able to get a higher price for the property by making it easier for people to buy (I’m happy to get paid over an extended period instead of upfront as long as the interest rate is reasonable for the risk I’m assuming).

In the end, this article helped convince me that a building could go to the dogs and I could be stuck with a massive problem. Part of me still feels that this risk is reflected in the price (why co-ops are so cheap), and that by doing your due dilligence you could determine if a building was well run or not (and perhaps be willing to step in and protect your investment if you saw that the building was going down hill).

Has anyone had experience living or investing in a co-op in Canada?  How did it work out for you?

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{ 3 comments… read them below or add one }

1 Jess Valenzuela

Interesting post!

Here are some explanations “condo vs co-op” http://www.washingtonsbestaddress.com/Condos_v_Co-ops.pdf

Banks hate co-op because it is a share of the whole corporation instead of the piece of the building. You need a special loan for it.

2 Doctor Stock

Great comment Jess. You’re right on the mark!

3 AnnieA

Simply do some research if you’re looking at a co-op. Find out how much is in the contingency fund, what their renovation/repair plans are, and have a good look at the minutes. Get the emergency meeting minutes too! A good read-through will unearth any problems, including info about resident loonies (I believe there is always at least one).

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