Homeowners Association Reserves

A home is an investment, not only in the property itself but also in a family and the community. Thorough reserve studies and funds ensure the homeowners association is prepared to maintain and replace the common elements of the community.

An HOA reserve study is a tool used to determine the projected costs of future improvements and maintenance. A professional analyst evaluates all aspects of a homeowners association, including any property the HOA is responsible for and makes a recommendation of how much will need to be spent on repairs in both the long and short terms.

How Much Should There Be in HOA Reserve Funds?

The types of projects to be undertaken and the amount of reserve needed will vary depending on the size and type of the community. Small associations of single-family homes without major amenities will only need HOA reserves large enough to cover the replacement of entrance signs and other similar projects.

The more amenities a community has, the larger of homeowners association reserve funds it will need. This way, the community can make sure to cover all amenities. This includes the resurfacing of pools, replacement of clubhouse roofs, and repair of playgrounds. Condominium and townhome associations need to have the largest reserve funds, as the HOA is usually responsible for the upkeep of the residential buildings themselves, and many have private streets and parking lots. Things like pressure washing, repaving, roof replacement, and exterior painting can be staggered across several years. But, even so, these projects are extremely expensive and a well-funded reserve account is necessary.

The exact amount needed to hold a well-funded reserve account will also vary from association to association. Most reserve studies include projections on how much the HOA will need to save and when. Many even take into account inflation, dues increases, and other economic factors to help ensure the association has the funds by the time the improvements are needed. A reserve account will also help the HOA in times when emergency repairs are needed and the operations account or insurance policy may not be enough to cover them.

Underfunded Homeowners Association Reserves

Although it may be hard to believe, a large chunk of homeowners associations in the country has underfunded reserves. While an underfunded reserve account might not make much of a difference now, it will become a problem in the future. It could lead to insufficient funding for large-scale repairs, maintenance, and replacements. As a consequence, an HOA board may resort to unpopular and, frankly, inefficient solutions.

An association with a lack of reserves might need to raise assessments by a significant amount to compensate for the loss. It might also lead some boards to cut costs, which could result in lowered property values. Another unwanted solution is to impose special assessments. Worse yet, an HOA board with underfunded reserves might resort to taking out a loan from a bank.

The best way to avoid these is to ensure reserve funds maintain a good level of funding. Ideally, all reserve funds would stay 100% funded. However, if that is not a possibility, a good rule of thumb is to maintain 70% funding.

The Importance of Homeowners Association Reserves

Though some homeowners may not be inclined to contribute to a reserve fund for future improvements they may or may not ever use, it is important to remember these improvements are inevitable. Reserves ensure each home’s value by demonstrating to prospective buyers that the HOA is prepared and financially sound. Some mortgage institutions may even refuse approval for a loan on a home in an HOA without a reserve fund. By having a reserve study performed and making sure a reserve fund is adequate, an HOA can protect the investments of its homeowners.

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