The Basics of HOA Reserve Funds that Every Board Needs to Know
Every forward-looking director understands the importance of ensuring their homeowner's association is healthy financially. But without a robust reserve account, accomplishing this task can be challenging. In addition, it would help if you had a reserve to take care of any future replacement and repair of primary assets.
Let's dive deeper to understand the HOA reserve fund and its importance in your association.
What's a Reserve Fund?
An HOA reserve fund is the amount of money that an association sets aside to offset ongoing deterioration. This facilitates timely maintenance, repair, and replacement projects when the project eventually needs to be performed.
Why Should Your HOA Have a Reserve Fund?
It helps your community prepares for inevitable repairs and maintenance. Resurfacing driveways and replacing shared roofs will occur, usually on a very predictable basis. So prepare and fund your reserve to ensure you're not caught unaware. An updated reserve fund makes your community's financial management game top-notch. Also, it's a legal requirement in most US states.
How Can You Fund your HOA's, Reserve Fund?
Your association's members are responsible for funding these reserves. How? Through fees, fines, assessments, and dues. Additional sources include returns and interest from current reserve funds.
How Much Money should an HOA Reserve Fund Have?
There's no one-size-fits-all answer since HOAs differ. The actual amount for a specific community depends on location, type, size, needs, and other considerations.
Estimating the right amount for your community requires you to:
- Identify your association's assets
- Estimate when these assets will require replacement
- Calculate the probable cost of everything
For more accurate calculations, your best bet is to approach a reputable Reserve analyst or Reserve Specialist to conduct an in-depth reserve study.
What are the Uses of HOA Reserve Funds?
The major maintenance, repair, and replacement projects are identified in your Reserve Study. Mostly, you can't use this money to cover regular daily costs. So, be sure you spend reserve funds according to your reserve study, state laws, and governing documents.
The most common uses of reserve funds include:
- Pool pumps
- Replacing roofs
- Common fence replacement
- Playground equipment
- Key landscaping projects
- Resurfacing sidewalk and roads
- Major renovations and constructions
- Painting buildings associated with the community
Top 4 Benefits of Up-to-Date HOA Reserve Funds
Should you be so inclined to put it in, the source of the 70% underfunded statistic is found here.
Fairness is established when every owner pays their fair share of deterioration during the time they own a home in the association. When budgeted reserve contributions offset ongoing deterioration, owners are not asked to pay "catch-up" or surprise special assessments for years of reserve underfunding for normal and predicable maintenance, repair, and replacement projects.
- Rock-solid prove of responsibility
Proper reserves show that the board's stewardship is top-notch. Homeowners will perceive that it's acting in their best interests. When you protect their most valuable assets (homes), you give them peace of mind.
- Attract buyers
Maintain an excellent community appearance, and your property value will skyrocket. An updated reserve helps the association to meet sudden expenses and repair and replace community assets. The result is improved resale values that attract potential buyers.
- Boost lender confidence
A well-operated reserve fund means the association won't issue a special assessment to pay replacements and repairs or cover an insurance deductible for a calamity. Instead, lenders will be happy that your community uses their funds on actual expenses, with a minimal chance that buyers will deplete funds or overstretch credit lines.
Also, some creditors ask for indicators of financial health when assessing home loan applications. So inadequate reserves may send red flags and lead to rejection of mortgage requests.