HOA reserve planning is necessary for effective community management. Board members must have a solid understanding of HOA reserve funds ad why it is important to have an HOA reserve planning study. In order to prepare your community for the future, here’s what you need to know:
Reserve Planning for HOA Boards: Important Q&As
What is an HOA reserve study?
An HOA reserve study evaluates the association’s major components, their lifespans, and the costs of replacement and repairs. The study helps create a multi-year plan for funding, which determines how much HOA reserve funds needed and that each homeowner is paying their fair share. The reserve study also establishes the timeline, specifications, and distribution of funds for capital improvements.
How can HOA reserve planning help HOAs better manage their funds?
In order to properly analyze and association’s assets, there are several components to a reserve study. The first step is to identify all the major amenities. From there, the reserve study will determine the cost of repair or replacement, as provided by a contractor. Finally, the remaining life of each asset is established. Once these three components are identified, a financial plan can be set.
For example, if resurfacing an Olympic size pool costs $50,000 and the current surface has six years remaining in its useful life, you will have to collect $8,340 every year in order to pay for the project when it’s required. This procedure is repeated for each of the community’s assets in order to calculate how much money is needed for the HOA reserves and when. The reserve fund should be adjusted every year to account for inflation and accumulated interest.
Should the association have inadequate funds, the financial plan may provide a way to replenish them. However it is funded, the goal should always be 100% funding. This is to ensure that the association will have the money on hand whenever it is needed.
When should an HOA reserve study be performed?
HOA reserve studies should be done at least every three years. You need to continuously reevaluate community assets to see how much time is left in their lifespan. An updated reserve study will also take into account changes in contractor bids due to inflation and other changes. Apart from the reserve studies, there should also be annual updates. These are inexpensive and a matter of reevaluating the funds and assets.
How do you manage HOA reserve funds?
Like with the money market and savings accounts, reserve funds should be kept separate from operating funds. This ensures that reserve funds are spent appropriately. Proper HOA reserve funds management also reduces the amount that needs to be collected from homeowners. HOA boards can consider long-term investments instead of a standard savings account as they have a higher return. Recommended investments include certificates of deposit (CDs) or government securities.
What are the financial problems associated with inadequate reserve funds?
If your reserves are underfunded, the HOA may need to levy special assessments to raise funds. Special assessments are often universally unpopular as they do not consider input from homeowners. Some HOAs with underfunded reserves choose to delay major projects. Postponing repair or replacement projects means the condition of the asset deteriorates. This not only lowers curb appeal and home resale values, but it will also result in a higher price for the project.
Can poorly-managed reserve funds reflect badly on the HOA?
Reserve funds, or lack thereof, is a sign of an association’s financial health and history. Buyers and lenders can often be put off by the lack of reserve funds. Not having a reserve means that special assessments will be inevitable and that the association may have a history of irresponsible spending. Potential homebuyers will not choose to invest in an HOA with this kind of reputation.
How much does a reserve study cost?
The costs associated with HOA reserve planning will depend on the type and size of your association, as well as the number of amenities. No matter the cost, it is worth the financial assurance that you receive from the study.
HOA Accounting and Financial Management Services You Can Trust
HOA reserve planning — combined with other accounting and financial management tasks — can be very overwhelming. Board members who do not have financial expertise may struggle to accomplish these essential tasks. If you want to secure the financial health of your community, Elite Management Services can be of great service. We offer comprehensive association management services that are designed to meet the needs of your community.