HOAs have two major accounts: the operating fund and the reserve fund. The operating fund – as its name states – is used for keeping up with day-to-day expenses and maintenance of the association’s assets. This is where the most transactions take place. The reserve fund is essentially a savings account. It is where the HOA saves money for more costly repairs and replacements.
Unfortunately, many HOAs have underfunded reserves. They don’t have enough money put back to cover estimated expenses in the future. Not every state has laws requiring reserve studies, but it is a good idea for every HOA, regardless of the laws, to have a professional reserve study conducted at least every few years. A reserve study evaluates the condition of major assets and amenities, estimates when they will need to be repaired or replaced, and how much that will cost.
Ideally, the HOA wants to have a 100% funded reserve meaning that it has enough money to cover all anticipated costs. However, having at least 70% is a good start. Less than that and the HOA runs the risk of having to implement special assessments or raise association fees to cover costs. This can be a burden on homeowners who must come up with this money on short notice.
Here are a few things to keep in mind when it comes to the HOA’s reserve funds:
- Hire a professional to conduct the reserve study. They know exactly what they are looking for and can guide the HOA in determining how much to save.
- If funding is coming up short, look for ways to readjust the budget and allocate a higher percentage of association fees to the reserve fund. Typically between 25% and 40% of fees should be put toward the reserve fund.
- Be transparent with homeowners about the status of the reserve fund and options for improving funding. This may require a larger increase in dues upfront, or smaller increases each year.
- Stay on top of preventive maintenance to keep assets in good working condition and prolong their lifespan. Repairs and replacement are inevitable, but proper maintenance can help protect against unexpected damages.
- Monitor the wear and tear on assets and amenities to anticipate repairs or replacements and be better able to plan for them when possible.
Yes, emergencies do happen, and they are unpredictable, but having an adequately – or preferably fully – funded reserve can offset some stress because the HOA knows that the money is readily available to address these issues. The team at Kuester works with HOAs to ensure they understand the importance of reserve funds and plan accordingly to meet future needs.