Imagine waking up to find your community’s pool closed indefinitely due to costly repairs or your beautifully paved roads crumbling because there aren’t enough funds for maintenance. These scenarios are all too common in communities with underfunded reserve funds.
While homeowners spend an average of $291 on monthly fees to be part of HOAs, most HOAs struggle to maintain a reserved fund, putting their residents at risk of hefty special assessments or declining property values.
HOA reserve funds are a financial safety net and the backbone of a well-maintained, thriving community. In this blog, we’ll delve into HOA reserve funds, distinguish between reserve and operating funds, determine the ideal reserve fund amount, outline steps to take if your reserves are lacking, and offer practical tips for effective fund management.
What Is a HOA Reserve Fund?
Suppose you have recently joined the homeowners association (HOA) or just started as a community association manager. Understanding what an HOA reserve fund is may be tricky.
Simply put, an HOA reserve fund is nothing but a rainy day fund for your community!
HOAs set aside a dedicated financial fund to cover the cost of significant repairs and replacements of common elements within the community. These funds are set aside over time, ensuring that money is available to address substantial expenses without imposing sudden, extensive assessments on homeowners. Your association can use the funds it receives to replace roofs, resurface roads, repair swimming pools, update landscaping, and much more.
Why Does Your Association Need a Reserve Fund?
HOAs are responsible for the upkeep of shared amenities and common areas within a community. Here is why your HOA needs a well-managed reserve fund:
Budgeting for the Future
A reserve fund allows the HOA to systematically plan for future expenses, ensuring that money is available when needed. This financial foresight helps maintain a steady and predictable budget. Besides, without a reserve fund, the homeowners must fund a significant expenditure, leading to financial strain. This would further invoke disappointment and dissatisfaction amongst the residents.
Maintaining Property Values
With a reserve fund, HOAs can focus on preserving community aesthetics. Regular maintenance and timely repairs keep the community looking attractive and well-kept. This is crucial for maintaining property values and common areas that contribute to the neighborhood's overall appeal. Moreover, HOAs may struggle to afford necessary repairs without a reserve fund, leading to neglected facilities and deteriorating infrastructure. This neglect can diminish property values and deter potential buyers.
Ensuring Safety & Legal Requirements
Some states, such as Massachusetts, Maryland, Florida, Connecticut, Delaware, Hawaii, Illinois, Michigan, and Minnesota, require HOAs to maintain a reserve fund. Failing to comply can result in legal penalties and increased liability for the association.
Additionally, many common areas and facilities, such as playgrounds, pools, and walkways, require regular maintenance to ensure their safety. A reserve fund ensures these safety issues can be addressed promptly, reducing the risk of accidents and liability.
Promoting Community Harmony
More than half, 57% of HOA members reported they’re happy with their membership as it makes their lives easier. In such a scenario, homeowners will likely trust and support an HOA demonstrating financial responsibility and foresight. A well-funded reserve signals residents that their association proactively manages community resources.
When unexpected expenses arise, it can lead to conflict and discontent among residents. A reserve fund minimizes the need for these sudden charges, avoiding disastrous conflict and promoting harmony within the community.
Encouraging Long-term Planning
A reserve fund allows the HOA to plan for and finance significant improvements and enhancements to the community, such as adding new amenities or upgrading existing ones. These strategic investments can enhance the quality of life for residents.
Besides, a well-managed reserve fund ensures the community is financially prepared for unexpected emergencies, such as natural disasters or sudden infrastructure failures. This proactiveness can mitigate the impact of such events and expedite recovery efforts.
It is safe to say that a wise HOA is likely to maintain a reserve fund to help it weather and cope with unforeseen financial emergencies! Now, let us explore the differences between operating funds and reserve funds.
Operating Funds vs. Reserve Funds
HOAs manage two primary types of funds – operating funds and reserve funds. Each serves a distinct purpose in maintaining the community's financial health and operational efficiency. Understanding these differences between the two is crucial for effectively running your HOA.
Operating Funds
Operating funds are used for the day-to-day expenses of running the HOA. These recurring and predictable expenses cover the routine costs of maintaining the community’s common areas and amenities. Operating funds are replenished regularly through monthly or annual assessments paid by homeowners. They cover utilities and services, maintenance and repairs, administrative costs, and staff salaries, ensuring the smooth daily operation of the HOA.
Reserve Funds
On the other hand, reserve funds are dedicated to significant major repairs and replacements that are not part of the regular, ongoing maintenance covered by operating funds. These expenses are typically large, infrequent, and planned over a long period of time.
Reserve funds are built up over time through some of the homeowners’ contributions. They cover capital improvements, major repairs, replacement projects, and emergency repairs. These funds are carefully invested to grow and provide a financial cushion for future large-scale projects and emergencies.
Operating and reserve funds are both essential for an HOA’s financial health and stability. HOAs must adequately manage and differentiate these funds to demonstrate responsible governance, build homeowner trust, and maintain the community’s property values and overall appeal.
An HOA can confidently address immediate needs and future challenges by effectively balancing and funding both accounts, ensuring a well-managed and thriving community!
The Appropriate Amount for a HOA Reserve Fund
Remember that you cannot employ a one-size-fits-all approach when allocating an appropriate amount for your HOA reserve fund! A HOA’s reserve fund solely depends on its varying needs, amenities, assets, and properties it manages. To determine a certain amount to be aside, HOAs must conduct a reserve study.
A reserve study will conduct thorough inspections of the HOA infrastructure and assets. This physical evaluation of the property is combined with a financial assessment to gauge an HOA’s economic stability. Here are a few things a reserve fund company or a specialist will do:
- Conduct a thorough inventory of all community assets.
- Evaluate the current condition and functionality of each asset.
- Forecast future repairs, estimate component lifespans, and determine current replacement costs.
- Project long-term financial needs for major repairs and replacements.
- Assess the health and adequacy of the existing reserve fund.
- Determine appropriate resident contributions to ensure financial stability and preparedness.
These inspections will help reserve study companies formulate a long-term plan for the potential upgrades and repairs required over the next 20 to 30 years. This plan will help you determine the ideal amount for your HOA reserve fund. It is advised to conduct a reserve study every 3 to five years so that your financial status is up to date before the HOA takes a drastic economic decision.
While HOAs must aim to have enough money in the reserve fund to overcome any financial emergency, a general rule of thumb is that the reserve fund must be 70% or 100% funded. For example, if the reserve study has given you an estimate of $50,000 for your reserve fund. You must aim to have at least $41,000 in your fund so that, in case of an emergency, you would only have to collect $9000 from residents, averting a financial disaster and strain.
However, most HOA reserve funds are underfunded, as association members struggle to allocate sufficient money. This may lead to financial risks and expose residents to detrimental financial burdens.
What Happens If Reserve Funds Are Insufficient?
In a scenario where your HOA reserve funds are not sufficient, it may lead to chaos! Imagine if you were to repair a leaking roof, but you don’t have enough funds. Your HOA would be scrambling to arrange for adequate funds. And the “beg, borrow, steal” principle may not be handy in this situation!
So, it goes without saying that if your HOA reserve funds are insufficient, the consequences may not be pretty for the HOA or its residents. While we don’t guarantee its success, here are a few options your HOA may consider to replenish its reserve funds:
Impose a Special Assessment
Special assessments are one-time fees you can collect from residents and homeowners in addition to their monthly dues. While your HOA can impose a special assessment on its residents, this may raise many skeptical questions about why the HOA has managed its finances.
Besides, HOAs may find it challenging to collect a hefty amount in addition to their monthly fees, which may cause residents to be disappointed.
Increase Resident Dues
Your HOA can increase its resident dues to compensate for its insufficient reserve fund. However, residents will be displeased about a significant increase in their monthly dues. Moreover, raising a sufficient amount through monthly dues may take months or even years. Remember, you cannot build your reserve fund overnight! It takes efficient long-term planning to be able to do so.
Seek External Financing
If all else fails, your HOA may consider seeking external financial support or taking out a loan to ensure sufficient funds are in the reserve fund. However, this is not a viable option in the long run, as your HOA may incur a hefty debt. Besides, if you have monthly loan repayments, your HOA may also fall short of its day-to-day funds.
The bottom line? Your HOA must conduct a reserve study regularly to ensure it has a long-term plan and maintains a sufficient reserve fund to avoid ugly scenarios with the residents!
HOA Reserve Funds: A Few Tips for Your Association
Here are a few tips for your HOA to efficiently manage its finances and build a reserve fund:
Seek Help When Required: Don’t hesitate to ask for help with reserve funds. The expertise required for effective management is significant, and if your board lacks real-world experience, it’s wise to consult a professional. Your HOA can seek invaluable guidance and support from a property management company or a reserve specialist!
Prioritize Reserve Funds: When selecting a property management company, prioritize their experience with reserve funds. During the initial interview process, inquire about their track record and how they can help ensure your HOA maintains an adequate reserve fund.
Make Gradual Changes: Focus on making small, incremental changes rather than large, sudden ones. Whether adjusting the operating budget or increasing dues, residents are more open to and adapt quickly to gradual changes. Remember, convincing your residents to a modest monthly increase is always easier than a hefty one-time assessment. So, choose your battles wisely!
Maintain Transparency: When managing HOA reserves, you must be as transparent as possible. Remember, these funds belong to residents, and they have a right to know how their funds are being utilized and the status of the funds. You can offer regular updates to instill trust and cultivate a cooperative atmosphere.
Monitor Common Areas: While you can’t predict every repair, vigilant monitoring allows you to address minor problems before they escalate into significant expenses. You can regularly monitor common areas and anticipate any repairs or fixes. Besides, your unofficial monitors are those few nosy residents who will always have a thing or two to report!
Invest in Preventative Maintenance: Your HOA’s investment in regular property maintenance can delay or even eliminate the need for expensive repairs or replacements. You can ensure your HOA has a preventative maintenance program that goes hand in hand with reserve study. After all, isn’t it better to be safe than sorry?
Elevate Your HOA Finances with ManageCasa!
With so many responsibilities, HOAs can find it overwhelming to manage their finances, too! But there is a way out – ManageCasa! We firmly believe owning and managing communities and properties should be easy for everyone. Keeping that in mind, we have built a dedicated, highly customizable platform where you can automate all the processes from your couch!
Connecting your HOA with ManageCasa gives you the opportunity to:
- Collect your HOA dues and fines online
- Streamline your HOA accounting processes
- Build budget plans and forecast income and expenses
- Calculate your assessments for your homeowners easily
This is just a glimpse of what ManageCasa can do; schedule a demo today to get the whole online HOA experience!
FAQs
- How are reserve funds collected?
Reserve funds are typically collected through a portion of the regular assessments paid by homeowners.
- What happens if an HOA doesn’t have enough reserve funds?
Without adequate reserve funds, the HOA may need to impose special assessments or take out loans to cover significant repairs, which can put homeowners under financial strain.
- How can we ensure our reserve fund is adequate?
Conduct regular reserve studies to assess the condition of community assets, predict future expenses, and adjust contributions as necessary to ensure the fund’s adequacy.
- Who manages the reserve funds?
The HOA board, often with the assistance of a property management company or financial professional, manages the reserve funds.
