When people think of New York City, they often imagine its iconic skyline, its bustling streets, and its notoriously complex real estate market. At the heart of that market lies one of its most unique (and sometimes bewildering) features: the co-op. Co-ops, or cooperative apartments, are a housing option almost synonymous with New York City, where they make up a staggering 75% of the housing inventory in Manhattan alone. But what exactly are co-ops, and why does New York have so many? More importantly, why do these properties baffle even the most sophisticated automated valuation models (AVMs) and stump would-be buyers?

Let’s take a closer look at the history, types, financials, and peculiarities of New York co-ops.

A Brief History: Why New York Loves Co-ops

Co-ops in New York City can trace their roots back to the late 19th century when a growing population of wealthy families sought exclusive, private living spaces. In 1881, the first co-op building, The Rembrandt, was constructed in Manhattan. It offered well-heeled New Yorkers a new type of housing—apartment living with a shared ownership model.

Fast-forward to the 1920s, and co-ops were booming. With the city’s real estate market growing rapidly, developers embraced the co-op structure as a way to finance high-rise buildings. Instead of selling apartments individually, developers sold shares in a corporation. Owning these shares entitled residents to live in a specific unit, and they shared control over the building. This concept not only appealed to the upper class but also offered tax advantages and allowed for more stable management of properties.

By the mid-20th century, co-ops became more mainstream as real estate investors turned rental buildings into cooperatives. For landlords, converting to co-ops was an attractive way to cash out in a regulated rental market. For tenants, purchasing shares in their building offered stability in the face of rising rents and provided a sense of ownership in the city they called home.

Today, co-ops remain a fixture of New York’s housing market, providing stability and community for many. But as the city continues to evolve, co-ops have found themselves grappling with modern challenges—especially when it comes to pricing and valuation.

Why Co-ops Dominate New York While Condos Reign Elsewhere

New York City’s real estate market is a unique beast, and the dominance of co-ops over condos here is a result of both historical factors and local regulations. To understand why co-ops are prevalent in New York, let’s first take a look at their origins and how they became a dominant form of housing in the city.

The Historical Context:

Co-ops became popular in the early 20th century, especially during the 1920s real estate boom when developers found co-ops to be a financially appealing structure. By selling shares in a corporation rather than individual units, developers could retain control over who lived in their buildings, attracting wealthy families looking for exclusivity.

At the same time, rent control laws and tight regulations in New York made it difficult for landlords to profit from renting properties. Converting buildings to co-ops allowed landlords to sell apartments directly to tenants, giving them an exit strategy from the rent-controlled market while providing tenants with an opportunity to own a share in their building.

Regulatory Factors and Ownership Control:

One of the main reasons co-ops have flourished in New York is the control they give to building owners. In a co-op, the building’s board, which is composed of shareholders (residents), has the power to approve or reject potential buyers. This level of control was attractive to the elite in early 20th-century New York who wanted to ensure that their neighbors were financially and socially suitable. Even today, some of the city’s most exclusive co-ops enforce strict requirements for new buyers, including reviewing detailed financial statements, interviews, and background checks.

In contrast, condos, which began to emerge as a popular alternative in the late 20th century, give less power to residents to dictate who buys in. Condo owners directly own their units and have fewer restrictions on selling or subletting, which is why condos are more common in other parts of the country where housing markets are less regulated.

Why Some People Prefer Condos:

While co-ops may seem more restrictive, they often offer lower entry prices and monthly fees compared to condos. This is largely because co-ops tend to include stricter subletting rules, which discourage speculative buying and keep prices from inflating rapidly. The nature of shared ownership in a co-op also fosters a greater sense of community, as residents collectively manage the building’s financial and physical well-being.

Moreover, in New York, building ownership structures for co-ops are often tied to long-standing, prestigious buildings that are located in prime real estate areas. For many, owning a share in a historic co-op is viewed as a badge of honor—an association with the city’s most storied and desirable addresses.

While rental properties dominate New York, as the following graph shows, the ratio of co-ops to condos is telling. The following chart, using data from NYC Open Data, gives a breakdown of the different property types in New York by unit count.

Types of Co-ops: Different Strokes for Different Folks

Not all co-ops are created equal, and understanding the different types can help potential buyers navigate their options more easily.

1. Market-Rate Co-ops

• Description: These are the most common and straightforward. When you buy into a market-rate co-op, the value of your shares fluctuates with the market. In a booming real estate market, you can sell your shares for a significant profit. The board’s main job is to approve buyers and ensure they meet the financial requirements.
• Flexibility: Owners can generally rent out their units with board approval, and the resale value is determined by the market.

2. Limited-Equity Co-ops

• Description: These co-ops are designed to provide affordable housing. The resale prices of units are restricted, meaning that owners can only sell their shares at a predetermined price, typically set by the co-op board or a government agency.
• Purpose: They are often created to serve lower- to middle-income residents, limiting profits for the sake of long-term affordability.

3. HDFC Co-ops (Housing Development Fund Corporation)

• Description: HDFC co-ops were established as part of a program by the city to promote affordable housing by allowing tenants of distressed buildings to purchase their apartments at low prices. These co-ops have income caps for buyers and sometimes restrictions on resale prices.
• Affordability: They provide an affordable option but come with restrictions on both income and future resale profits.

4. Mitchell-Lama Co-ops

• Description: These co-ops were created under the Mitchell-Lama program, which is a government initiative to provide affordable housing to middle-income families. They have strict rules regarding income limits and resale values, often requiring units to be sold back to the cooperative or priced below market value.
• Subsidized: These co-ops benefit from government subsidies, which help keep them affordable.

5. Eviction Plan Co-ops

• Description: These co-ops emerged in the 1970s and 1980s when rental buildings were converted to co-ops under an “eviction plan.” Under this structure, tenants who didn’t buy into the co-op could eventually be evicted after a certain period, unless they agreed to purchase their units.
• Controversial: While no longer common today, this plan sparked significant tenant activism in its time.

6. Non-Eviction Plan Co-ops

• Description: Under non-eviction plans, rental buildings converted to co-ops allowed tenants to continue renting even if they chose not to purchase their units. Over time, as rental tenants move out, those units could be sold as co-ops.
• Gradual Transition: These plans have allowed buildings to gradually convert from rental to co-op status without displacing tenants.

7. Condop (Hybrid Condo-Co-op)

• Description: A “condop” is a combination of a condominium and a co-op. In most cases, it refers to a co-op building that includes commercial spaces (which may be structured as condos) alongside residential co-op units. In some cases, condops offer more flexible rules, similar to condos, allowing for easier subletting and purchasing rules.
• Flexibility: Condops often have less restrictive boards and ownership rules, making them appealing to buyers who want more freedom than a traditional co-op provides.

Understanding these types is crucial not just for buyers but for anyone trying to value these properties, which brings us to our next point: why co-ops are so difficult for automated valuation models.

Why Co-ops Are Tricky to Value (For Both People and Machines)

Both people and Automated Valuation Models (AVMs) face significant challenges when it comes to valuing co-ops, despite advancements in technology and data analysis. While AVMs have revolutionized real estate by using algorithms and big data to estimate property values quickly, co-ops present unique complications that confound both human appraisers and sophisticated algorithms alike. Here’s why:

1. Lack of Comparable Sales Data: One of the fundamental issues with valuing co-ops is the limited availability of comparable sales data. Unlike condos or traditional homes, where sales are public and recorded, co-op transactions are private. This lack of transparency makes it difficult for both human appraisers and AVMs to gauge the market value of co-op shares accurately. Without sufficient data on recent sales within the building or similar buildings, both people and machines are left to make assumptions, which can lead to inaccurate valuations.
2. Subjective Board Approval: Co-op boards play a pivotal role in determining who can buy into a building. They have the authority to reject buyers based on their financial history, lifestyle, or even personal preferences. This subjectivity is a significant challenge for AVMs, which rely on objective data to predict property values. Even for human appraisers, it’s tough to put a price on the unpredictability of a board’s decision-making process. A unit may be worth a certain amount based on market trends, but if the board blocks the sale, that valuation becomes meaningless.
3. Financial Health of the Co-op: The financial well-being of the entire co-op building can dramatically affect the value of individual units, but this information is often opaque. Factors such as the building’s underlying mortgage, cash reserves, and financial management can influence share values, but AVMs struggle to capture these details. People face similar challenges since the financial reports of co-ops are not always readily accessible or easy to interpret. A building with high debt or low reserves may reduce the value of all its units, yet this critical information might be missed by both man and machine alike.
4. Unique Financial Structures: Co-ops operate under a shared ownership model where residents don’t own their unit outright but rather own shares in the corporation that owns the building. This structure can complicate valuations because the value of shares can vary depending on building-wide financial policies, pending assessments, or future repairs. AVMs are particularly ill-equipped to factor in these nuances, while even seasoned human appraisers may struggle to fully assess the implications of a co-op’s unique financial dynamics.
5. Co-ops are not just “a kind of condo.” As the following graph will show, using data collected by Miller Samuel Inc., they have appreciated differently throughout the years. While in the mid-90s the price gap closed from its 50% high in the 80s, we now see that that gap has increased. Condos in Manhattan sell for nearly double the price of a co-op. 

In short, the combination of private transactions, subjective decision-making, and the financial complexities of co-op buildings makes it challenging for both people and AVMs to accurately value co-ops. Whether you’re an investor, a buyer, or a seller, navigating the valuation of a co-op requires a deep understanding of both the building’s internal workings and the broader market trends—something that even the best technology can struggle to achieve.

Financials of Co-ops: Understanding the Numbers

When you buy into a co-op, you’re not just purchasing a place to live—you’re buying shares in a corporation. And like any investment, it’s important to understand the financials behind it. Here are a few key concepts:

1. Maintenance Fees: Co-op owners pay monthly maintenance fees, which cover the building’s operating costs (utilities, staff salaries, repairs, etc.). A portion of this fee may also go towards the building’s mortgage if one exists. These fees can vary greatly depending on the size of the building, its amenities, and its financial health. Buyers need to be aware of maintenance fees when considering affordability, as they can sometimes be quite high—especially in luxury buildings.
2. Underlying Mortgage: Many co-op buildings have an underlying mortgage, meaning the corporation that owns the building still owes money on it. This debt is shared among the shareholders, and the amount owed can significantly affect the building’s financial health. Co-ops with large underlying mortgages may have higher maintenance fees, which can deter potential buyers.
3. Flip Taxes: Some co-ops charge a “flip tax” when a unit is sold. This tax, paid by either the buyer or seller, goes into the co-op’s reserve fund. It’s typically calculated as a percentage of the sale price or the unit’s shares, and it helps ensure the building has enough money for future repairs and improvements. While not technically a tax, this fee can impact the financial appeal of a co-op, especially for buyers looking to flip their property for a profit.
4. Reserves: A well-run co-op will maintain a healthy reserve fund to cover unexpected expenses like major repairs or renovations. Buyers should always inquire about the building’s reserves before purchasing, as a low reserve fund can indicate future assessments or higher maintenance fees.

Fun Facts and Quirks About New York Co-ops

No article about New York co-ops would be complete without a few interesting tidbits about these quirky residences:

• Celebrity Co-ops: Some of the city’s most famous residents, including Madonna, Jerry Seinfeld, and John Lennon, have lived in co-ops. In fact, the Dakota, where Lennon lived, is one of the city’s most iconic co-op buildings. But even celebrities aren’t immune to the whims of co-op boards—Madonna was famously rejected by her co-op’s board when she tried to purchase a unit for a family member.
• Strict Boards: Speaking of boards, they can be notoriously picky. In some luxury co-ops, you’re not just buying an apartment—you’re buying into a very exclusive club. Boards often require prospective buyers to submit extensive financial documentation, letters of reference, and even personal interviews.
• Unique Financing Rules: Co-ops often have stricter financing rules than condos. Many boards require buyers to put down at least 20% of the purchase price, and some even mandate higher percentages or all-cash deals. This can make buying a co-op more difficult for first-time buyers or those with limited cash reserves.

Conclusion: Co-ops—A Unique Slice of New York Life

New York City co-ops are a fascinating mix of history, finance, and real estate quirks. While they offer a sense of community and long-term stability, they also come with their own set of challenges, from complex financials to the unpredictable board approval process. Whether you’re considering buying into a co-op or just trying to understand their place in the NYC housing landscape, one thing is clear: co-ops are as unique and dynamic as the city itself.

With their rich history and complex valuation factors, New York co-ops offer a distinct, sometimes baffling, but always intriguing window into the city’s ever-evolving real estate market. Understanding their intricacies is essential for anyone looking to make their mark in the world of New York real estate—or simply trying to find a place to call home.