HOA fees go to two major funds: (1) the operating fund, which is used for “typical fees” like the community’s regular maintenance and operations, and (2) the reserve fund, which is saved for more costly repairs, periodic large projects, and emergencies.
How much should be put in the reserve fund?
At least 10% should be budgeted to go into the reserves to fund the community’s CAPX projects.
However, depending on the community’s age, the amenities it offers, and other factors, your board may need to put MORE THAN 10% in the reserves to keep the community properly funded in the years to come.
To know the exact numbers, have a professional conduct a reserve study in your community or condominium.
The reserve study will outline how much money your board should be actually contributing to your reserves each year. If you have hired an HOA management company, they may offer this service.
What happens when reserves are underfunded?
It is never a good idea to underfund your reserves.
When the reserves go underfunded, two outcomes can be expected: (1) a need for emergency funding in the form of special assessments and loans and (2) deferred repair and maintenance, which will lower property value.
Special assessments and loans are always more expensive than proper reserve contributions, so your community will end up spending more money.
Our reserves are underfunded. What should we do?
Between special assessments and deferring repairs, it’s wiser to levy special assessments on homeowners to fund emergency projects that will keep everyone’s property value up.
Be transparent with the homeowners about the status of your reserve fund.
Look for opportunities for cost savings to help keep the fee hike manageable for everyone.
Readjust budget allocations so you can contribute a higher percentage of HOA fees to the reserve fund.
Best Practices in Managing Reserve Funds
1. Hire a professional to conduct a reserve study.
A professionally prepared reserve study will inform your board what community assets will likely require repair and replacement, how much you should have in the reserve fund, and how much you should be putting away in reserves on a monthly or yearly basis to avoid underfunding.
Ask your HOA manager if they offer this service.
2. Stay on top of regular maintenance.
Regular preventive maintenance will prolong the life span of community assets and keep them in good working condition. Although emergencies and large-scale repairs are inevitable, diligent upkeep and maintenance will lessen the likelihood.
Also, closely monitor the condition of each and every asset and amenity of the community so you can anticipate repairs and replacements and plan accordingly.
3. Slightly increase HOA fees each year.
It is best practice to slightly increase HOA fees each year to account for inflation and offset the effects of economic fluctuations. That being said, the amount of money, say, equivalent to 10%, that should go to the reserves will slightly increase each year too.
Remember that your $500,000 reserves today cannot cover the same emergency project tomorrow.
Photos by Michael Longmire and Pepi Stojanovski on Unsplash