Housing Cooperatives: How Not To Become a Victim? 

A housing cooperative is a voluntary association of citizens based on their membership. It is established with the purpose of procurement of lodging by citizens, and also to supervise an apartment house. The legal status of housing cooperatives is defined in the law of the Kyrgyz Republic “On cooperatives”.

Usually, they work for the benefit of their members and profit generation is not their primary purpose of operations.

Housing cooperatives can be divided into two types.

1. A housing savings cooperative. The number of participants is not limited, they can procure real property at any place. The only requirement is that the real property meets all criteria. Now, almost all housing cooperatives in Kyrgyzstan belong to this type, although there is no such a notion in law.
2. A house-building cooperative. In this case, you receive an apartment in the apartment block that is built at the cost of the cooperative. The number of shareholders depends on the number of apartments in the project under construction. This model has existed since the Soviet Union and is well known to many people. However, the existing housing cooperatives in the real property market of Kyrgyzstan are not engaged in construction. Some of them claim that they will build houses at the expense of the emergency (contributions) fund in the future.

In the Soviet Union, first house-building cooperatives appeared in mid-1920s, but became widely spread at the end of the 50s. The demand was caused by the severe housing shortage that appeared due to the sharp city population upsurge.

Citizens who became members of cooperatives built houses at their own cost, but received subsidies from the state at the rate of 70 per cent for 20 years and other privileges. Future property owners often took an active part in the construction process to cheapen and expedite works. Construction gangs composed of the members worked second and third shifts.

In general, such cooperatives did not affect seriously the solution to the housing problem. Their proportion in the general housing construction in the USSR did not exceed 10 per cent. The major portion of the housing stock was built at the cost of the state.

However, the soviet model, when the state took part in house-building cooperatives in the form of providing subsidies, was successful. Back then, the state protected interests of the cooperative members.

In 2018, Russia returned some elements of the Soviet model. Now, house-building cooperatives are outlawed in Russia, but new house-building cooperatives are now supported by the state. Such cooperatives are voluntary associations of citizens created to build houses on the lands provided by the state at no cost. Such cooperatives with state support have no risks of having cheated members because the register of members is maintained by the cooperative itself controlled by companies that are employers of the cooperative members, as well as regulatory bodies.

It is structured as follows. All members of the housing cooperative make the down payment at the rate of 30-40 per cent of the housing cost, and pay the remaining amount within 10 years by instalments without interest. The cooperative buys the apartment for shareholders in order of priority.

Here comes a logical question: what is the profit of the housing cooperative founders and how do they work? First, as was previously mentioned, profit-making is not the main purpose for housing cooperatives. Second, this is a voluntarily association of citizens who try to acquire the house by joining forces.

However, housing cooperatives cover their costs and earn money on membership fees. In addition to the price of the house or apartment, you should also pay the membership fee – 2-4 per cent of the house price, and monthly membership fee in some cooperatives.

Say, you are going to buy the apartment for 40 thousand dollars via the housing cooperative. In this case, you will have to make the down payment of 12-16 thousand dollars. And also the membership fee – 800-1600 dollars, which is not used to buy the house.

Thus, you don’t pay extra 17-20% as in the bank mortgage, but you still have to pay the extra money.

According to lawyer Fatima Yakupbaeva, there are various risks. The main risks are related to the fact that the cherished house will not be owned for various reasons:

• A cooperative can turn out to be a Ponzi scheme, which means that the money will not be returned, and the property will not be bought;
• The queue of shareholders is organised by a variety of non-transparent schemes;
• The cooperative can remove its shareholders for the failure to pay extrajudicially;
• Legally, the entrance fee and annual membership fees do not mean the purchase of the apartment. 

Back in 2019, the National Bank of Kyrgyzstan warned that the country was overwhelmed with various cooperatives with the signs of the Ponzi scheme. According to it, some cooperatives market their services as the alternative to consumer and mortgage loans, but they do not have approval documents for banking transactions, namely reception of deposits from citizens.

“The most widespread type of Ponzi schemes in the world is the type where people are offered programmes for buying cars, apartments, land plots, etc. and are demanded to pay 5 to 30 per cent of the amount, and the organisation promises to pay the rest from the constant influx of new customers,” the National Bank of the Kyrgyz Republic said.

The expert, also the founder of one of the housing cooperatives, Kuban Choroev, explains the housing cooperative scheme with the elements of the Ponzi scheme as follows: a person pays 25 per cent of the total amount and they promised to him to buy the real property in six months, for example. 4 newcomers are needed for that. And then 16, and 64, at the exponential rate.

“There will be the stage when they will not be able to purchase houses to all within the specified time. And 80 per cent of disappointed participants who are left homeless will start having legal proceedings with buyers of real property,” Choroev said.

The National Bank sets the following rules: 

• Lack of approval documents or registration of a legal entity with state registers;
• Active advertising on the media, internet, including social media, to attract clients;
• Activity depends on the acquisition of a good deal of customers.

According to Kuban Choroev, the main features of the Ponzi scheme are the guaranteed time of buying the house, and the lack of priority and transparency.

“If you are told to invest 30 per cent and come in 4-6 months to acquire the house, then it is simply money raising for the Ponzi scheme,” the expert said.

Bona fide cooperatives do not promise deadlines because they have some order and usually it ranges from 1 to 2.5 years. Ponzi schemes attract citizens by short waiting periods.

As mentioned above, there is a law on cooperatives that regulates housing and construction cooperatives, but not a word is said about housing savings cooperatives, which are now very active in the market. In addition, the law does not clearly define the rights of shareholders and responsibilities of the cooperative. In such cases, risks are doubled.

According to lawyer Fatima Yakupbaeva, the NBKR cannot regulate housing cooperatives in the framework of the current legislation. Legally, they do not grant loans, credits or sell currency. They accept money and with this money should buy housing for their members. 

Cooperatives are registered with the Ministry of Justice, Tax Office and Social Fund. They open a bank account and work. They do not need licenses or certificates. They work on the basis of their charters and the law on cooperatives.

Kuban Choroev in late 2021 predicted a boom of deceived shareholders of pseudo-cooperatives. His predictions turned out to be correct, and in recent years there have been more and more videos of dissatisfied and crying shareholders on the Internet. According to the expert, the state will act after something happens as always, when there will be a lot of victims. Although it was in the state’s interest to develop bona fide housing cooperatives and protect citizens from fraud.

Fatima Yakupbaeva believes that the state should conduct outreach work with the population, including through state TV channels. And also summarise the practices of receiving such police reports and generalise the judicial practice.

Lawyer Fatima Yakupbaeva, recommends paying attention to the following moments: 

1. Read the charter and the certificate of registration of the cooperative. Make sure that it is indeed a housing cooperative.
2. Read the charter, how many votes are enough to appoint a director, accept and remove the members of the cooperative?
3. Compare the number of cooperative members with the number of apartments purchased via it: how many people are there in queue?
4. Make a clause in the agreement with the cooperative about the ban on increase of the value of the apartment after payment of the basic portion of the instalment.
5. Upon joining the cooperative, you should obtain certified copies of the relevant documents (copy of decision on joining and copy of the minutes of the meeting).
6. If you leave the housing cooperative early, keep in mind that the shareholder loses the entrance fee and membership fees. He may also be penalised for failure to meet his obligations to the cooperative.
7. Keep in mind that the shareholder’s liability is limited by the amount of their instalments. If you have paid the total of 1 million som, your liability will be 1 million som only.