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?
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.
Many homeowners associations operate on the fiscal year (July through June). If your Association is one of them then hopefully you have your new and improved budget ready to go because July is just around the corner.
As an HOA board member you probably know the basics of HOA accounting, and that the process is reversed from the typical American’s household budget.
The purpose of the reserve fund is to plan for future repairs and replacements in the association. But what about components that you can’t see and aren’t listed in the reserve study? For example, plumbing supply lines that aren’t included in the reserve study and will end up costing somewhere in the ballpark of $50,000 to repair or replace.
More often than not, sitting down to review your HOA reserve study can be about as easy to understand and enjoyable as sitting down to review the U.S. Tax Code. Just reviewing your reserve study is not enough. As an HOA board member, you’re responsible for using that study to plan for, allocate, adjust, and collect reserve funds accordingly.
Here are some ideas to help you interpret your association's reserve study, and put it to good use so that your HOA can pay for what your community needs to keep it in good repair, easy on the wallet, and lovely to live in...today and in the future.
Reserve funds are not an extra expense. They are part of the ongoing expenses of the homeowners association which occur at various points in time. The plan provided by your reserve fund specialist will help you in this process. It's much more preferable that homeowners associations have a plan to set the funds aside now, on a year-by-year basis. By doing this, the Association can spread out the collection of assessments for these expenses more evenly over the coming years.
There are other important reasons that Association monies should be put into reserves every month:
Funding community operations is one of the most important, if not the most important, functions of an HOA board. Properly overseeing day-to-day actions and long-term projects ensures the homeowners association will have a continuous supply of funds to keep the community running effectively.
You don’t want to be bored with numbers, spreadsheets, dollars and cents. You already know that’s what a budget is made up of. Instead, what actions are the most important for you to actually do to ensure financial success in your homeowners association? There are a lot of pieces and parts that come into play, but following this advice will help you get started in the right direction of financial health for your community.