An HOA’s reserve is an integral part of its financial stability because this fund helps pay for significant repairs and replacements that come up over time.
Unfortunately, many HOAs have underfunded reserves, which can cause some big problems down the road. When this happens, knowing what steps an HOA can take to rectify the situation is imperative to the community’s future.
This article will dive into the issues that keep reserve funds underfunded and provide the solutions to get back on track. We’ll discuss proven ways to increase HOA reserves and tips on making sure your HOA is doing the right things to protect its financial strength.
HOAs Reserve vs. Regular Savings
First, let’s explain the difference between an HOA’s reserve and regular savings. The reserve is not savings or a fund that you can dip into whenever necessary. It is primarily used for emergencies, major repairs, and replacements for the community’s common areas.
The reserve fund is not for day-to-day expenses like your monthly association dues. In fact, there are three different types of funds that residents pay into every month:
- Operating Fund (for everyday operation and upkeep)
- Maintenance Account (for deferred maintenance and repairs over time)
- Capital Account (for major replacements of common areas, buildings, etc.)
HOA’s often use operating funds to fulfill the day-to-day needs of their members, such as homeowner association dues, payment for property insurance, and landscaping.
However, funds in the reserve account are for special projects and repairs. Some associations also use reserve funds in preparation for a contingency that may come up down the road.
How Much Money Do You Need in Your Reserve Fund?
When you’re dealing with an association’s reserve fund, you want to make sure that the money is at the right level. Your primary expense will be repairs and replacements; this requires hundreds of thousands of dollars per year based on the size of the community.
Your community should ideally have a filled HOA reserve account, which means it has adequate money to meet all expected expenditures. While this can be difficult to achieve, 70 to 85% is also a reasonable figure.
If the percentage falls below 70%, the HOA will most likely rely on special assessments or raise association dues to meet expenditures.
Underfunded Reserve Funds Can Be Very Costly
If your association does not have enough money in the reserve account, the HOA board members will have a few options that are probably not in their best interest.
They may decide to pass on these costs to homeowners by raising their dues, or they could sell some assets or even borrow money.
This third choice can be very costly, as most banks and lenders charge hefty fees and interest rates for loans like this. They may also be afraid of what others will think about the situation, so they might not act quickly enough to fix things in a reasonable amount of time.
How Do You Fix An HOA Underfunded Reserve?
While there are different ways to fix your reserve fund, the main thing is to find a solution that works for you and your board. Below are some proven ways to resolve underfunded reserve issues, such as:
Conduct A Reserve Study
A reserve study entails calculating current reserves, determining their adequacy, and tracking trends over time. It helps boards decide whether or not they need to change the association (such as increasing dues).
This report will give you a clear picture of your HOAs’ financial situation and provide various ways you can correct the insufficient balance.
A reserve study will also help ensure that the reserves are always at the appropriate percentages and establish the projections needed for the repair budgets.
Seek External Financing
Another way to fix your HOA’s reserve fund problem is to seek external financing. If the reserve fund is too low, you can apply for a short-term line of credit, and this can be helpful for significant repairs or replacements.
Collect A Special Assessment
You can revitalize the association’s finances by asking for a special assessment from each homeowner. Once all of the homeowners agree, the association will create a plan and add it to the budget.
It’s a good idea to take this route for major repairs and replacements, as it is more economical than trying to borrow from the bank.
Increase HOA Dues
This undoubtedly won’t be the most popular option, but it is the most intelligent choice in many cases. When your community is in dire need of capital, you can increase dues. Increasing your HOA dues will be a significant decision for the board and shouldn’t be taken lightly.
However, this type of move will ensure that the board has enough money to maintain the community and pay for all necessary repairs and replacements.
The small increases in assessments and increased dues can help fix these issues, and they can also provide the communities with finances to prepare for future problems.
Don’t Be Afraid To Ask For Help
If you need assistance with your reserve fund, don’t be afraid to ask for help from a qualified financial advisor. These people specialize in helping associations by using their knowledge and experience to navigate complex HOA reserve issues.
They will also provide you with the information you need about applying for external financing or creating a special assessment to handle repairs.
If you’re having trouble maintaining adequate funds, then it’s essential to talk to a professional first so that they can prove possible solutions more scientifically before making any decisions.
It would be best if you also understood how much money you’ll need to build up your reserve fund each year and considered setting a minimum level.
This way, even though there might be times when you don’t collect enough revenue to pay out all planned expenses, you still have a cushion. An association with sufficient reserves can continue operations even if the pool is drained completely.
However, if the fund is too small, you may be forced to reduce services or cut corners because there isn’t enough money for unforeseen repairs or maintenance.
Every association needs to ensure that its reserve fund has a solid foundation and maintains a balance that keeps unexpected expenses at the right level.
If you have questions about your HOA’s reserve fund, do not hesitate to contact us today. We are happy to answer any questions you might have and help you create a strategy for your HOA reserve fund management.