Why Reserve Funds Are Necessary

shutterstock_300108776No one likes to spend their hard-earned money on community association dues. Just like taxes, everyone complains about having to pay them and resents it when they go up. Sometimes an HOA will try to please their residents by avoiding fee increases and dipping into their reserve funds to cover a rise in costs. As attractive an option as this may seem, it is one that sacrifices long term planning for short term comfort. Not only that, but depleting the reserve fund in the name of saving residents money is often a road to costing them even more money when an emergency happens.

The Importance of Reserve Funds

Reserve funds are an HOAs buffer against future large expenses. By allocating part of residents’ regularly collected dues to a reserve fund, community associations are taking appropriate measures to make sure that they have a source of cash that can be quickly accessed when long-term maintenance issues arise.

If an HOA doesn’t properly maintain their reserves, they will be forced to quickly raise fees or levy special assessments to cover the costs of emergency repairs and maintenance. When this happens, all the good will that was built up by skimping on dues collection goes out the window. By avoiding modest raises in dues over a period of time, and sacrificing the budget to deal with emergency issues, an HOA without a reserve will find itself cash-strapped and having to deal with angry residents from whom it is suddenly demanding large amounts of money without any warning.

Getting the Reserve Study Right

The exact legal requirements for reserve studies vary from state to state, but it is in an HOA’s best interest to commission a new reserve study every few years. Both California and Florida require reserve studies to be performed every three years, which is a good time frame for community associations from other states to use as well. HOAs should also take care to find the right people to perform the study. It may be more expensive, but having the study supervised by someone certified by the Community Association Institute (CAI) and the Association of Professional Reserve Analysts (APRA) will go a long way to make sure that you get an accurate study. HOAs will also want to make sure that the people who perform the physical part of the inspection are trained as well, either in construction, engineering, or another relevant field that shows they have knowledge and experience.

HOAs should also be sure that they take the findings of the reserve studies seriously, and adjust community association dues according to what they say. While it is not always necessary to levy the full amount of money that the reserve study projects will be needed, HOA boards should make sure that they do keep a significant portion of the amount in reserve (70% is a good target.) By levying the appropriate funds ahead of time and being prepared for future expenses, HOAs will prevent grumbling over fees today turning into cries of anguish over even bigger fees tomorrow.

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