Successful HOAs and community associations must plan ahead for their future needs, so they can budget and save today for property and amenities that will require repair and replacement well into the future. Money is allocated each year to a special reserve fund, and the amount that needs to be funded (and utilized) over time is determined through a reserve study.
Bach, James, Mansour & Company doesn’t conduct reserve studies, but we review them as part of the HOA audits and financial reviews that we conduct. Many communities have well-funded reserves, and some are even over-funded in our opinion. Unfortunately, I see during our audits and hear from board presidents and frustrated property managers too often that their communities:
- Don’t have a current reserve study
- Aren’t allocating enough money to meet reserve study requirements
- Don’t have a reserve fund
Operating without a current reserve study is like navigating without a map
Whether you’re planning for your own personal needs or the future of your community, you need to have a goal. The reserve study documents what the association needs to set aside to maintain property value and quality of life as your community matures. Expenses change, so you need to update your reserve study every 3-5 years. Here are a couple of major expense shifts that I observed during eight years on my HOA board of directors.
- Water slides – there are now only a couple of water slide manufacturers left in the US. The cost of replacing our water slide doubled in less than five years.
- Retention ponds – our “lake” requires silt removal every 2-3 years, and major dredging every 8-10 years. We didn’t allocate enough for regular maintenance.
Find a quality firm with specific HOA experience (we can recommend some), commission a reserve study, and then keep it current.
Fully fund your reserve account every year
Just like with your family budget, you need to stick to the plan to make ends meet. That means making the tough decisions required to maintain annual reserve account funding when there are always many competing items that require financial attention today. If you get off track and under-fund your reserve account, it becomes exceedingly difficult to catch up. In fact, it’s pretty rare to see a neighborhood catch up without raising dues.
Yes, I mentioned the toughest two words that an HOA board member will ever have to say – dues increase. Communities with underfunded reserves have only two real options: cut the budget or increase dues. Special assessments are only a temporary fix, are best implemented for single or catastrophic events, and are often tough to approve given the high percentage of residents who must agree. Don’t kick the can down the road. Make the right decision.
The best time to start saving is… today!
“Do you have a reserve study and reserve fund?” I ask this question during our pre-audit interviews. An awkward silence following the question normally means that a community hasn’t commissioned a reserve study or established a reserve fund, or had a fund before a previous board spent the money. It’s also more prevalent in self-managed communities, since property management companies keep an eye on reserves as part of their accounting process.
Club houses, condo buildings, and townhomes require paint, roofs, floors, and other ongoing repairs. Amenities, like pools, parks, and tennis courts, require regular maintenance. As your community ages, it will require major capital expenditures. If your community doesn’t have a reserve study and account, start today. Commission the study and start funding the reserve account.
As a board member, your community’s financial health is your responsibility.
As a HOA board member, it’s your fiduciary duty to manage association funds and property. Having an underfunded reserve account creates future problems for your community. Avoid the hassle, commission a study, and fund your reserves with current or increased dues. An adequately funded reserve account will ensure that your community maintains its financial health well into the future. Plus, you’ll make life easier for future board members!
Neal Bach, CPA