Cooperative flats are for many people the only way to own their own home. This is especially true when property prices are constantly rising. The main reason people choose a cooperative flat is its lower purchase price. This is typically 10% to 30% lower than buying a flat in personal ownership.
Many people associate cooperative housing with the past. However, the truth is that many developers are still building cooperative housing today. This is despite the fact that such construction is administratively more expensive for them, as they are aware that cooperative flats are becoming increasingly popular. Projects include the British Quarter in Prague 5, Habr and Prosek Park in Prosek, the Oáza project in the centre of Liberec, and many others.
Let’s look at the advantages and disadvantages of living in a cooperative flat, what an annuity is, and what options there are for obtaining a mortgage.
Cooperative flat versus personal ownership
Before we discuss the advantages and disadvantages of a cooperative flat, let’s clarify the difference between a cooperative flat and a flat in personal ownership. While a flat in personal ownership is solely ours, a cooperative flat is not. We can freely dispose of a flat in personal ownership. This means we can sell it, rent it out, or use it as security to obtain a mortgage.
Things are different with a cooperative flat. The housing cooperative is registered as the owner of the house in the land registry. We only buy a share associated with the right to use the flat. By law, we use the flat as a tenant (even though we do not pay rent). If we decide to rent out the cooperative flat to generate passive income, we must first obtain the consent of the housing cooperative.
Advantages and disadvantages of a cooperative flat
Advantages of a cooperative flat include lower housing costs and a faster transfer process. We do not have to wait for the transfer to be processed in the land registry, as with a flat in personal ownership. Because ownership does not change (the cooperative remains the owner), the transfer takes place almost immediately, on the day the contract is delivered to the cooperative.
Another significant advantage is that the housing cooperative carries out most of the repairs to the flat and the building. The cooperative is responsible for the overall maintenance of the building. We also do not have to pay property tax, as the cooperative does.
Disadvantages include limited rights to dispose of the flat and complications when financing the flat with a mortgage. If we decide to carry out renovations to the flat, we must request the consent of the housing cooperative.
Problems can also arise in the event of inheritance of a cooperative share. If the share is in joint ownership, it automatically passes to the other spouse. It is more complicated if the cooperative member is single and has several heirs. In this case, the inheritance cannot take place because there can only be one cooperative member (except in joint ownership). The only solution is to settle the shares between the heirs. The question is, what is the value of the cooperative share? Sometimes an assessment from a real estate agent is sufficient. However, the heirs may not agree with their opinion. Therefore, inheritance of a cooperative share can often be a major dispute between the heirs.
Annuity
An annuity is a payment for a loan provided by the cooperative for the building. If we own a cooperative share, we are obliged to contribute to the repayment of this loan. The annuity can range from a few thousand to hundreds of thousands of CZK. It can be paid in one lump sum or in monthly instalments.
Before we start looking to buy a cooperative apartment, we need to find out how high the annuity is that the apartment is burdened with. We add its amount to the acquisition price of the apartment and compare whether acquiring the cooperative apartment is more advantageous than acquiring an apartment in personal ownership.
Before acquiring a cooperative apartment, we will be interested not only in the amount of the annuity, but also whether the seller has any obligations to the cooperative that could pass on to us. For example, underpayments of tax (nedoplatek) for services.
Mortgage on a cooperative apartment
Obtaining a mortgage on a cooperative apartment can sometimes be complicated. However, this does not mean that it is impossible. Due to the rise in popularity of cooperative apartments, the surrounding world must adapt to them. And especially banks, which directly offer financing for cooperative apartments.
There are three options. The first is a mortgage on a cooperative apartment with a lien on another property. As we are not the direct owner of the property, we cannot provide security for it either. However, we can provide security with another property, a cottage, parents’ house, or another apartment in our ownership.
Another option is a mortgage on an apartment that will eventually pass into personal ownership. Most cooperatives gradually carry out the transfer to personal ownership (OV) (of course, after paying off the annuity). If we know that our cooperative apartment will eventually be in our personal ownership and we obtain a written promise from the cooperative that this will happen within two years, a so-called pre-mortgage loan (předhypoteční úvěr) is an option. Once the apartment is ours, we can create a lien on this property in favour of our bank. Then the pre-mortgage loan will be converted into a classic mortgage with lower interest rates.
The third option for financing a cooperative apartment is a building savings loan (úvěr ze stavebního spoření). However, this is associated with several limitations. Primarily, a higher interest rate and a shorter maximum repayment period. On the other hand, we do not need to provide security for the property. Banks offer the possibility of setting up a building savings loan even if we do not have building savings set up with that bank. Many people do not know that these two products are not linked. Therefore, they do not consider this alternative.
Sale of a cooperative apartment
Before we start the transfer of the apartment, it is advisable to find out whether the cooperative will accept the new member. Especially if the buyer is a foreigner or a legal entity.
The seller and buyer enter into an Agreement on the Transfer of Membership Rights and Obligations to the housing cooperative, or a Settlement Agreement (Dohoda o vypořádání). At the same time, they enter into a Custody Agreement (Smlouva o úschově). Subsequently, the buyer or the bank sends the money into custody.
Then the parties submit the contract to the housing cooperative. The cooperative cannot obstruct the transfer. The effects of the transfer occur upon delivery of the contract to the housing cooperative.
The housing cooperative issues a new Tenancy Agreement to the buyer. Subsequently, the funds in custody are released to the seller. Then it is enough to resolve the transfer of utilities and hand over the apartment.
The process of transferring a cooperative apartment is noticeably simpler and faster than transferring an apartment in personal ownership.
