Homeowners’ association board members often deal with the question: “How much money should an HOA have in reserve?” Similar to businesses or organizations, HOAs use reserve funds as a means to prepare for the future. HOA reserve funds are highly liquid assets that are used to meet future financial obligations. Reserve funds can come in handy whenever there are unexpected costs — both big or small. Thus, it’s crucial for every organization to determine how much money is put into their reserve funds.
With this guide, you’ll understand the purpose of homeowners association reserve funds. You’ll also be able to analyze the different factors that determine how much money should be kept in your reserve.
How Do HOA Reserve Funds Differ from Operating Funds?
HOA finances are mainly allocated to two financial accounts: the operating fund and the reserve fund. To understand what is a reserve fund, you need to know how it differs from the community’s operating funds.
An operating fund is used to finance the daily expenses of the HOA. This includes payment for property management, maintenance of shared spaces, security and janitorial services, legal and office expenses, and insurance premiums. In contrast, a reserve fund is used for large-scale projects and improvements that are expected to happen in the future. Usually, it is used for repairing and/or replacing common structures, such as clubhouses and pools.
When it comes to HOA reserve funds, association members are particularly strict about how these funds 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 the uses of reserve funds 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.
By having these examples as a guide, you’ll have an easier time differentiating between operating funds vs reserve funds, with the former focusing on paying for day-to-day expenses.
Why Are HOA Reserve Funds Important?
HOA board members are responsible for the upkeep and maintenance of any community. Apart from managing the day-to-day operations of the HOA, they also have to anticipate financial obligations that may come in the future.
This includes the repair of the clubhouse roof when it starts leaking, the regular resealing of the swimming pool tiles, and the replacement of broken fitness equipment in the gym.
HOA reserve funds are not only used as a means to pay for replacement and repair costs, but it can also be used to renovate or upgrade a public area for the benefit of the entire community. This includes the exterior painting and driveway sealing of communal areas.
These larger-scale projects are significantly more expensive than the usual daily operating costs of the community. Having a reserve fund allows the board to fund these expenses without having to raise association dues or resorting to special assessments.
With sufficient cash in the HOA reserve funds, the community will be able to account for unexpected expenses. For example, common structures such as the clubhouse may experience damage due to hurricanes and tropical storms.
In these cases, it’s always better to be safe than sorry. When it comes to reserve funds, board members will be able to easily resolve any issues concerning the HOA. They can carry out necessary changes in a timely manner without burdening the homeowners with additional costs.
How Much Reserve Should an HOA Have?
Now that you have learned the difference between an operating fund and an HOA reserve fund, the importance of having a reserve fund and the expenses that take money from the HOA reserve fund, let us now proceed to identify the amount of money necessary to be put in your HOA reserve funds.
Truthfully, there is no definite answer to this question. The amount of money will depend on your community, its features, and its needs. With that in mind, it’s highly advisable that every HOA conduct a reserve study regularly. This is so that the board can have a better grasp of how much money should be allocated to the reserve fund.
Reserve studies are usually conducted every 3 to 5 years. Apart from that, the board should also conduct a yearly inspection of the community’s amenities as well as the budget to see if adjustments need to be made.
Since most board members may not be equipped to conduct reserve studies, HOAs can seek the services of an accountant or the property manager. The reserve study entails a physical analysis of the community as well as a financial analysis of the budget. It can then provide you with an estimated cost of what needs to be replaced, repaired, or renovated in the next couple of years.
Every HOA community has different needs. They can also significantly vary in size and numbers. By having a reserve study, you’ll be able to evaluate the condition of the major assets of your community.
What Happens When the HOA Reserve Fund Is Underfunded?
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.
Unfortunately, there are a significant number of HOA reserve funds that are underfunded. Thus, when these communities encounter unexpected costs, the board scrambles to find the money to pay for these expenses. They might suddenly increase association dues, or worse, seek inefficient solutions such as external funding.
Despite a number of issues and hindrances, most HOAs are able to have a 70% funded reserve. While not at full capacity, 70% is a good level to maintain. This allows the HOA to fulfill its duties and responsibilities without compromising any needed expenses within the community.
What to Consider When Dealing With HOA Reserve Funds?
If you’re currently dealing with your HOA reserve funds, here are some tips that can make the entire process more manageable:
- Consider a professional to conduct the reserve study. A professional has the appropriate knowledge and skills necessary to determine how much you need to save. Thus, you can feel confident about the results of your reserve study.
- Look for an HOA management company that can assist you with accounting work and other financial tasks. By having a community manager, you can avoid unnecessary errors and expenses that may drain your reserve fund.
- Always find ways to adjust the budget should the need arise. Incremental increases over a period of time will be much more manageable than collecting a sizable lump sum.
- Always be transparent with the homeowners regarding the status of the HOA reserve fund. This includes transactions that board members make on behalf of the community. By knowing the level of their HOA’s reserve fund, homeowners may be more understanding in case additional dues need to be collected.
- Regularly monitor the wear and tear of common areas, as well as pieces of equipment in the community. This is so that you can anticipate any spike in repairs and replacement costs.
- Always remember that proper maintenance will go a long way to prevent any unexpected damages. It’s better to have regular but minor expenses rather than deal with a large-scale problem.
Enjoy the Benefits of an HOA Reserve Fund
HOA reserve funds are important for the maintenance and improvement of any community. As such, it is the responsibility of board members to ensure that their HOA has an adequate reserve fund. The money in this fund is crucial to implement repairs and replacements that normally happen over time, as well as those that happen unexpectedly.
To ensure that the community has enough reserve funds to run smoothly, HOAs should conduct reserve studies every 3 to 5 years. It can help to have an HOA management company to help you with these crucial physical and financial matters. In the end, HOA reserve funds are necessary to ensure that everyone within the community is living their best lives.