Homeowners associations are established to ensure the proper maintenance of common areas, amenities, and other community resources. To fund these, HOAs rely on the contributions made by homeowners in the form of regular assessments and reserve funds. The reserve fund is essential in ensuring that the HOA can cover unforeseen expenses, repairs, or replacement of community property. However, what happens when the HOA board fails to maintain the reserve fund at a proper level for the association?
Reserve studies are a critical tool for HOAs to help ensure that they have adequate funds available to cover future repairs, replacements, and other significant expenses. These studies provide a comprehensive financial analysis of an HOA's reserve fund, including an inventory of the property's common elements, estimates of their remaining useful life, and projected costs for their repair or replacement.
In a homeowner's association, members pay their assessments, and those assessments are divided between operating and reserve accounts. That money goes to pay for the upkeep of common area components in an association. Individual board members should not have access to those funds.
The idea isn't that an individual or small group would profit from the assessments being paid, but rather that all members would collectively benefit because that money's being used for the common good of the entire homeowner’s association.
Many HOA board members get into trouble due to not understanding the operating fund and reserve fund in a homeowners Association. If these two funds aren’t properly maintained, a Board can unintentionally cause the Association to fail financially. Therefore, it’s crucial that Boards understand how to correctly use the operating fund and reserve fund.
Groups that are run by volunteers that handle money are particularly vulnerable to fraud, embezzlement, illegal activities, and scams. HOA boards are no exception. Access to funds is a temptation that some cannot resist.
The Board of Directors for your homeowners association has an immense financial obligation to the community. One of the HOA board's most important jobs is to keep legible and accurate financial reports and records. These reports and records provide an overview of your community’s revenue and expenses against its financial projections or budget.
As a Board member of a homeowners association you may be faced with making decisions to foreclose on homes in your Association. This is not a pleasant task, but it is a necessary one at times. Some homeowners may challenge the entire process and you and the Board should know what you are doing and why.
It’s inevitable – someday you’re going to be faced with a project in your homeowners association that has to get done with the funds that just aren’t there. Since money doesn't grow on trees, what’s an HOA board member to do? It can be a tough spot to be in, but depending on what the project is and how much money you need, you do have options. Remember, it’s the board’s responsibility to protect, maintain and enhance the Association.
Picture yourself in this scenario: The clubhouse needs a new water heater and it will cost $10,000. But all prior reserve studies that have been done in the association have only allocated $6,000 for replacement. What are the board’s options to make up the additional $4,000 difference?
As a general practice, what does an HOA board do if there’s a problem in the association that exists right now, but not enough money in the reserves to fix it? Is issuing a special assessment the way to go, or can the board use other funds in the reserves?