How financially healthy is your HOA reserve fund? That’s obviously a complex question, but a great way to ascertain the basic financial health of your community organization is through analyzing the reserve fund. A reserve fund is sort of like the “rainy day” fund for your Community Association—money that is set aside for capital improvements, emergency maintenance, or whatever other needs might arise. A community association reserve study provides a good barometer for the basic financial health of your organization.
Just how telling is the HOA reserve fund study? Telling enough that any potential residents, thinking about moving into an HOA-governed community, are encouraged to ask about the most recent reserve study, just as those who already live in an HOA-governed community should know when the last reserve study took place. In both cases, this provides crucial insight into the way the board’s finances are being handled.
A reserve fund study should be conducted at least once every five years. As part of the study, the HOA should evaluate the strength of all common areas that fall under the HOA’s purview—for example, swimming pools, courtyards, pavilions, roofs, air conditioners, and anything other physical property for which the HOA is responsible. The reserve fund study should provide an estimate as to how far into the future maintenance or replacement will be needed for these things—and how much that maintenance or replacement might cost.
The basic gist of the HOA reserve fund study, then, is to compare how much money should be on hand for future repairs, and how much money there actually is in the reserve fund. This is what provides insight into the basic financial standing of the HOA.
Part of the money received via homeowner’s association dues should go into the reserve fund. Of course, the goal is for it to be 100% funded, though an HOA that’s 75% of the way there has nothing to be embarrassed about. It’s when the reserve fund is less than 50% funded that the association’s financial status should truly be a worry.