The Impact of Inadequate Reserve Funding by the HOA Board
May 11, 2023 / by HOA Manager
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?
Review the Annual Budget
First, it’s essential for homeowners to review the budget and reserve study annually to see how well-funded their reserve account is.
Even before buying a property in an HOA, it’s crucial to review the reserve study before signing the escrow paperwork. But suppose you're currently a homeowner in an association and you notice that the reserve study is not well-funded?
HOA boards are obligated to act in the best interest of the community and are held to a fiduciary standard. Fiduciary responsibility is the duty to act in the best interest of another party, putting their interests above one's own. In the context of an HOA, the board members have a fiduciary responsibility to manage the community's finances prudently, including properly funding the reserve account.
Homeowners should review the budget and reserve study on an annual basis to see how well-funded the reserve account is. The reserve study provides an estimate of the amount of money required to cover repairs, replacements, and other unforeseen expenses over a set period. If the reserve study shows that the reserve fund is not adequately funded, homeowners should bring it to the attention of the HOA board.
When a reserve specialist recommends a particular contribution to the reserve fund, the HOA board should take that advice seriously. Choosing not to take the advice of specialists and experts in their fields puts the board at risk of losing some protections. The board must act in good faith and make decisions that are in the best interest of the community. If the board disregards the recommendation and decides not to follow it, it could put them at risk of legal action.
Pay a Special Assessment
Not maintaining the reserve fund at the proper level can lead to a special assessment, which is an additional payment levied on homeowners to cover unforeseen expenses. Nobody likes special assessments, and it can create a lot of tension between the HOA board and homeowners.
However, if the reserve fund is inadequately funded, special assessments may become inevitable, leaving homeowners with no choice but to pay. In that case, it's important to speak with the board and express your concerns, even if that means facing a higher assessment to fund necessary repairs or maintenance.
If the HOA board fails to fulfill its fiduciary duty and maintain the reserve fund at the proper level, homeowners may have the right to take legal action.
Take Legal Action (not recommended)
Homeowners who are dissatisfied with the HOA board's failure to maintain the reserve fund at the proper level may have the right to sue the board. However, legal action should be considered as a last resort, as it can be costly and time-consuming. In some cases, the HOA may need to impose a special assessment to pay for legal fees, which would defeat the purpose of taking legal action in the first place.
Elect New Board Members
Instead of taking legal action, homeowners can elect new board members who will manage the community's finances responsibly or become board members themselves. By being involved in the decision-making process, homeowners can ensure that the reserve fund is maintained at the proper level and that the HOA board acts in the best interest of the community.
Can the HOA board be sued for not maintaining the reserves at the proper level? While the answer is technically yes, it may not be the best solution for homeowners.
If the board is not properly funding the reserve account, homeowners have options to address the issue, including speaking with the board, electing new board members, becoming a board member themselves or legal action as a last resort.
HOA boards have a fiduciary responsibility to manage the community's finances prudently, including properly funding the reserve account.
It's important to be proactive and stay informed about the financial health of the association to ensure a comfortable and worry-free living environment for everyone involved.
Topics: HOA Management, Reserve Funds, HOA Accounting