Reserve funds are most commonly used by businesses or organizations as a means to prepare for the future. It is considered a highly liquid asset which is set aside to meet any future financial obligations. Reserve funds can come in handy whenever there are unexpected costs. Nevertheless, it is crucial for every organization to take into account how much money is put into their reserve funds.
With this guide, you’ll be able to analyze the different factors affecting the decisions revolving around a homeowners association’s (HOA) reserve funds.
What is the difference between an operating fund and a reserve fund?
When it comes to HOA financials, you should know about the two major accounts – the operating fund and the reserve fund.
An operating fund is used to pay for the ongoing expenses of the HOA. This typically includes contracted services like security, property management, maintenance of common spaces. It can also include financial services and office expenses.
In contrast, the reserve fund is used for larger projects. Usually, this means repair and/or replacement of common structures like clubhouses and pools. When it comes to an HOA’s reserve fund, association members are particularly strict about how these monies will be spent. Any spending must adhere to the community’s rules and regulations, as well as accountability and bylaws.
Think of reserve funds as the money used to pay for expenses that do not occur on a regular basis. Some of these may include:
- Major landscaping projects;
- The construction of new playground equipment or a neighborhood park;
- The replacement of a pump at the community pool;
- Roof replacements on some of the common area buildings;
- Painting of clubhouses and other community associated structures;
- Any replacement fees involving fencing projects in HOA controlled areas;
- Other major construction and renovation projects like sidewalks.
Why do HOAs need reserve funds?
It is the HOA board member’s job to oversee, operate, maintain, and manage the common areas within the community. This includes any need for the replacement or repair of a particular structure. A reserve fund is an important tool in this job. Moreover, the homeowners association reserve funds are not only used as a means to pay replacement and repair costs. In fact, the HOA reserve funds can also be used as a means to renovate or upgrade a public area for the benefit of everyone in the community. With sufficient cash in the HOA reserve funds, you’ll thank yourself if the roof of the clubhouse starts leaking, or should a piece of equipment in the community’s fitness room breaks down.
Every community needs HOA reserve funds to account for any unexpected expenses. It’s always better to be safe than sorry. When it comes to reserve funds, every HOA will be able to easily resolve any issues concerning unexpected common area expenses with the said money.
How much money should be in the HOA reserve funds?
Now that you have figured out the difference between an operating fund and an HOA reserve fund, the importance of having a reserve fund, and the expenses and types of activities which requires money from the HOA reserve fund, let us now proceed to identify the amount of money necessary to be put in an HOA reserve fund.
Most HOA reserve funds are underfunded. Whenever they encounter unexpected costs, they wouldn’t know where to get the money to pay for the services.
With that in mind, it is highly advisable that every HOA conduct a reserve study every few years so that they could better grasp how much money should be allocated to their reserve fund. The truth is that every HOA community has different needs since they may vary in size and numbers. By having a reserve study, you’ll be able to evaluate the condition on some of the major assets within the community.
Reserve studies can help you with having an estimated cost of what needs to be replaced, repaired, or renovated. Ideally, a 100% funded reserve is the best option for an HOA to have as it means that you can cover all of the anticipated costs from the findings of the reserve study.
However, due to a number of issues and hindrances, most HOA would only have about a 70% funded reserve. Nevertheless, 70% is already a good start. It can allow the HOA to fulfill its duties and responsibilities without compromising any needed expenses within the community.
Here are some of the tips to consider when dealing with an HOA reserve fund:
- You should hire a professional that will deal with the reserve study. You can ensure that they have the appropriate knowledge and skills necessary to determine how much you need to save.
- Look for an HOA management company, such as the Cedar Management Group, that can assist you with accounting work and other financial tasks.
- Always find ways to adjust the budget should the need arise.
- Always be transparent with the homeowners regarding the status of the HOA reserve fund.
- Monitor the wear and tear of public areas and other pieces of equipment within the community so that you can at least expect any spike in repairs and replacement costs.
- Keep in mind that proper maintenance can go a long way to prevent any unexpected damages.
In the end, an HOA reserve fund is necessary to ensure that everyone within the community is living their best lives. If you still have any questions or concerns regarding your HOA reserve fund, do not hesitate to contact us online or by phone at (877) 252-3327.