Reserve Funds: Do You Know How Much Your HOA Needs?

Posted by Amos Fred on January 23rd, 2021

An adequate homeowner’s association (HOA) fund ensures that you have money to repair and replace common assets.

So, how much money is enough?

Ideally, the fund should cover 100% of the capital items’ expenses. However, 70% of that expenditure is reasonable.

The following factors determine how much your HOA needs in the reserve fund.

1.   Consider What your Reserve Fund Study Recommends

A reserve fund study is the first step in determining how much it would realistically take to cover repairs, maintenance, or replacement works.

A good reserve fund specialist can also help you forecast when the capital item may need repair or replacement and estimate how much the project would cost.

It can also recommend the amount you need in the HOA reserve account over time, say in the next 30 years. One technique such a study uses is doing valuations and considering each asset’s depreciation rate.

From there, you can decide with other HOA members on how to raise the amount.

Otherwise, you may place an unexpected financial burden on homeowners when repairs and replacements are due.

2.   Some State Regulations Can Dictate It

HOA best practices are now becoming law in some states.

For instance, in Washington, California, Virginia, and Florida, the law regulates reserve fund calculations and disclosures.

The state laws require that the HOAs maintain the amount recommended in a reserve study report.

So, is that also the case in your state? 

3.   How Much is in the Opening Balance?

 An HOA may create and maintain a reserve fund account before conducting a thorough analysis of their community’s needs.

It is a proactive step.

In that case, once you’ve conducted a reserve fund study, you can just top up the rest of the amount the report recommends.

4.   Factor Inflation Rate

You’ll want to keep the rate of inflation in your region in mind.

Here’s why.

A change in your areas’ inflation rate causes the prices of capital items to rise or fall. That can translate to costlier replacement parts, hence more expensive repairs.

Calculating inflation will also help you determine how much more your members need to contribute, providing enough for future repairs, replacements, or maintenance works in the community.

5.   Conduct A Special Assessment

Perhaps you did conduct a reserve fund study and implemented its recommendations fully.

An emergency can happen and interfere with your finances. An example is an unexpected flood or fire. Making repairs can cause a dramatic shortfall in funding, which may necessitate a one-time contribution.

You’ll arrive at how much your homeowners need to contribute by conducting a special assessment. 

  1. See If you Are Approaching Critical Years

Critical years occur when your reserve money approaches its minimum balance. Again, your reserve fund specialist should tell you when to expect those years. If they do not, feel free to ask about it.

Keep in mind that the closer the critical years are, the less time your HOA will have for saving enough for capital projects. So, start early.  

Bottom Line

It is best practice and the law for an HOA to conduct a reserve fund study for capital items’ expenditure in some states.  

But whether it is the law or not, investing in a reserve fund specialist can help your community in several ways.

These include knowing how much to maintain in the reserve account, how much to contribute, and enough funds in case of an emergency in common areas. Over to you.

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Amos Fred

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Amos Fred
Joined: April 24th, 2018
Articles Posted: 205

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