Maintaining a homeowners’ association’s (HOA’s) financial health is a key responsibility of the board of directors. A task that can be easily overlooked, creating a reserve account to cover future repairs and replacement of major assets is crucial to successfully fulfill this duty. Read on to learn more about HOA reserve funds, why your association needs one, and more.
What’s an HOA reserve fund?
An HOA reserve fund is money set aside by a community association for additions to major components the association is obligated to maintain and future replacements and repairs that don't occur on an annual basis.
Why does my HOA need a reserve fund?
A reserve fund is your community's way to plan and prepare for the inevitable repairs and updates you know will happen, such as replacing a shared roof or resurfacing common roads and driveways. An up-to-date reserve fund is critical to the financial management of a community and is required by law in most states.
How are HOA reserves funded?
Reserves are funded by association member assessments, dues, fees, and fines. Additional money can come from interest and returns earned from existing reserve funds.
How much money should an HOA have in its reserve fund?
Every HOA is unique and will require a different reserve amount depending on its needs, size, type, location, and other factors. To decide how much money is enough for your community, you’ll need to identify what your association owns, estimate when things will need to be replaced, and then calculate how much everything is going to cost. A Reserve Specialist or Reserve Analyst can perform a professional reserve study to help determine the appropriate amount.
What are HOA reserve funds used for?
Reserve funds will have a plan in place for how and when money can be spent. In most cases, reserves can’t be used for regular, everyday expenses, so always check your governing documents and state laws before allocating any reserve funds. Reserve fund expenditures often include, but are not limited to:
- Roof replacements
- Pool pumps
- Playground equipment
- Replacing fencing in common areas
- Painting of community-associated buildings
- Major landscaping projects
- Construction and major renovations
- Road and sidewalk resurfacing
4 Benefits of Well-Funded HOA Reserves
Creating and maintaining an adequate reserve fund is part of a board’s fiduciary duty, but some studies estimate that nearly 70% of HOAs in the United States have underfunded reserves. The following are four reasons to make sure your reserves are properly funded.
1. Proven Responsibility
Well-funded reserves demonstrate good stewardship of the association’s money. Homeowners will have peace of mind that the board is acting in their best interest, and their most valuable asset—their home—will be protected.
2. Guaranteed Preparation
Proper reserves allow the association to pay for unexpected expenses, like damage from earthquakes, hurricanes, and other natural disasters. If an unexpected event occurs and sufficient funds aren’t set aside, a special assessment may need to be issued.
3. Increased Lender Confidence
Lenders appreciate a well-funded reserve because that means an association is less likely to issue a special assessment to cover repairs and replacements or pay an insurance deductible for a natural disaster. Lenders are more confident that their money is used on actual costs, with a very small chance that a buyer will overextend credit lines or deplete cash. Some lenders also assess for indications of financial health when reviewing mortgage applications, and an association with inadequate reserves may be at risk for mortgage denials.
4. Buyer Attractiveness
The overall appearance of a community translates directly into its property value. With appropriate reserves, associations can cover unexpected expenses and community asset replacements, improving resale values, keeping current homeowners happy, and attracting new buyers.
Webinar: What You Need to Know About Reserve Funds & Studies
To learn more about HOA reserve funds and studies, check out our webinar, “What You Need to Know About Reserve Funds & Studies.” In it, we break down commonly asked questions and provide helpful tips and insight from experts.