Any HOA budget has a number of competing priorities. No matter the amount of assessments you are collecting, it can often seem like you never have what you need to meet all the Association’s current expenses AND have enough remaining at year end to put aside for reserves. A reserve account is your community’s best protection against financial catastrophe. If you don’t currently have a healthy reserve fund in place, make a Reserve Study a strategic planning priority. It will help you attract better homeowners and prevent deep deficits and emergency assessments.
Why You Need Reserve Funds
Things that your association are responsible for will eventually deteriorate. You’ll find that each year, something needs to be repaired or replaced. Roofs will begin to leak, asphalt will start to crumble, and paint will begin peeling on the outside of your common buildings. Having a reserve fund for these major projects will help you prepare for them, and budget accordingly. A strong reserve fund is also necessary to attract buyers into your Community. Prospects are becoming more aware of the need for reserves within a community and when the review the community’s reserves (within the balance sheet) they are expecting to see a substantial reserve fund. New owners don’t want to spend their money on special assessments every month because previous board’s didn’t budget or set aside enough for future repairs and replacements.
Reviewing Your Reserve Account
The board should conduct a reserve study every few years. This will allow you to identify future repairs and projects that will require funding. You can plan how long you have before the driveways are sealed or the parking areas are re-paved. It’s also an opportunity to estimate costs and ensure that you’re on track to cover those expenses in the time allotted. Make this an agenda item annually or every two years.
How Much is Enough?
The amount that you should hold in your reserve account depends on your community, its residents, and the activity of your HOA. If there’s little that your association is responsible for, you won’t need to have as much. Many lenders require that at least 10 percent of a board’s annual budget is directed towards the reserve fund.
If you’d like to learn more about budgeting and establishing a reserve fund, please contact us at Community Property Management. We’d be happy to provide additional advice and resources to your HOA board.