How to Eliminate the Risks of Inadequate HOA Reserve Funds
July 14, 2020 / by HOA Manager
The risks of not having enough HOA reserve funds for your community are as serious as the risks of not having enough emergency savings for your family. Imagine needing to pay for college tuition increases or costly medical expenses without having enough money set aside to do so. Now imagine fellow homeowners having their family budgets crushed by emergency assessments because there aren't enough HOA reserve funds for repairs. They’ll likely call you as a board member to complain!
Why not avoid these situations altogether? Having HOA reserve funds readily available “just in case” offers you and your fellow homeowners financial peace of mind.
Know the Risks of Insufficient HOA Reserve Funds
It’s often said that “high risk leads to high reward.” Not so with your HOA reserve funds. High risk leads to risky financial standing.
- Underfunded HOA reserve funds create the need for special assessments. This can be a 10-thousand-dollar financial blow to personal budgets.
- Bad decisions result from bad planning. Think long-term benefits, not short-term savings.
- Homes may not sell. Buyers may reconsider purchasing if your HOA’s financial documents show that HOA reserve funds are too low or there's a pattern of increased assessments.
- Property values may depreciate dramatically due to unsightly common areas.
- Lenders may not fund loans when there are no HOA reserve funds in place.
Know Your Options
When you have adequate HOA reserve funds, line items can be reallocated to meet unexpected expenses. For example, if a boiler fails in year seven instead of year ten as projected, funds can be shifted to pay for it.
Let’s say your plumbing system fails and the cost is the entire amount in your HOA reserve funds. Rather than depleting your account, you may be able to “borrow” from the reserves or use a combination of regular and special assessments to replenish HOA reserve funds.
Use experts for input on major repairs. You want to get the best results for your money, not necessarily the cheapest ones. Work with your reserve specialist to determine the best course of action.
All associations must prepare a reserve study every three years. This study lists the major components of common areas and corresponding estimates of their useful life. The board must share the funding plan with HOA members during year-end budgeting. Allocations are only projections and can be revised as needed.
Perform Your Fiduciary Duty
Remember that operating funds and HOA reserve funds must be kept separately and be in good standing. This is probably a board member's most important fiduciary duty.
Adopt a “Reserve Funding Plan” in an open meeting to fulfill your HOA’s obligation to maintain the property. Review your budget consistently and make tough decisions to ensure that enough money is being put away.
Don’t delay repairs for the sake of keeping money in reserves. If repairs are necessary, then the repairs should be done, even if it means depleting HOA reserve funds.
Even though there is no mandate to fund reserves by the Davis-Stirling Act, it's wise to do so to avoid any possible legal disputes. Court has held that a board's failure to fund the reserves was a breach of the board's fiduciary duty.
Here are tips for effective funding strategies so you can maintain the beauty and functioning of your community:
- Use your reserve study as a tool. Review it at least once a year and adjust as necessary to minimize emergency assessments. Proper planning, member input, and consistent funding are key.
- Use bank loans. If a special assessment is necessary to raise HOA reserve funds, a bank loan could help lessen the burden on members. Your HOA could then make immediate repairs while spreading the cost over time.
- Save for deductibles. Add a line item for insurance deductibles and contribute to it within your HOA reserve funds so the money is there when the bill is due.
- Don’t undercut maintenance to keep assessments low. Look at your options. For example, it might be better to pay more for high-quality paint so it lasts longer and saves on labor.
- Do your research. You’ll feel confident when responding to owners about funding decisions when you have the knowledge and resources to back them up.
- Take baby steps. If your HOA reserve funds are too low, it's possible to rebuild them over time. Start slowly, increase assessments gradually, and watch your HOA reserve funds grow.
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Topics: HOA Management, Reserve Funds, HOA Accounting