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.
A homeowner’s association’s worst nightmare occurred on June 23, 2021, when a 12-story beachfront condominium in the Miami suburb of Surfside, Florida partially collapsed. Many people died, many were injured, making it one of the deadliest building collapses in American history. It’s important to acknowledge and address a tragedy like this to respect the lives that were lost and the families affected, while also learning from the experience to make sure it doesn’t happen again.
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 slightly technical definition of a reserve study is: a budgeting tool based on the art and science of anticipating and preparing for major common area repairs and replacement expenses an association will face in the future.
Planning for future repairs and maintenance costs of common areas in the homeowner’s association is one of the most important jobs of an HOA board – and also one of the most neglected. Sometimes, boards are just short-sighted, focusing on the essentials that need to be done in the association now. While today is important, tomorrow must not be forgotten.
One issue that makes it difficult for boards to plan for the reserves is the pushback they receive from current homeowners because they have a hard time seeing how assessments for future projects will benefit them now. Learn how a reserve study protects owner value for both future and current homeowners in the association in the article excerpt below.
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.
Your association board is planning for the big project on the horizon, and is currently reviewing how to finance it. For several reasons, you don’t believe you’ll have enough funds in the association’s operating budget or reserves to cover the project’s entire bill. What should you do? Split the project up over several years, levy a special assessment, or maybe get a loan?
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.