How much should a HOA have in reserves?
Millions upon millions of Americans live in and enjoy the care-free lifestyle offered by an association-governed community. Whether it be in a highrise condominium, homeowner association (HOA) or single-family home community, association living offers many benefits. One major convenience relates to the association’s responsibility for the upkeep and look of the common areas. Owners officially get time off to enjoy their home and community while entrusting that someone else, the association, helps keep everything running well and looking good. Whether it be the weekly landscaping, the ongoing pool cleaning, or annual street maintenance, responsibility rests with the HOA or condominium association.
The benefits of association living are of course not free. Members of an association need to regularly pay a fee to ensure that the maintenance, upkeep and management of their community continues year after year. HOAs and condominium associations are non-profit organizations and need to impress upon their members to pay enough to keep things running smoothly. It should also be noted that the fees payed by owners are invariably the association’s main source of income. The fee amount is representative of the money needed to pay for both ongoing annual expenses (operating) and longer-term capital asset repair and replacement costs (reserves).
The funds allocated to the annual operating budget generally cover expenses that are experienced over the course of one year. Operating expenses typically relate to the routine maintenance of the common areas, utilities and other annual expenses. Reserve expenses do not occur as frequently and are considered by some to be the ‘hidden cost’ of living in an association. Repair, replacement or major maintenance expenses related to common areas assets like roofs or roads make up a significant portion of the association’s costs.
So how much money should a condominium or HOA have in reserves?
How much money should a HOA have in reserve is dependent on a number of factors. The HOA reserve calculation is built on the idea that the association will maintain the look and value of the community. The HOA reserves rule of thumb is based on the idea that a HOA has a minimum of 60% of the depreciated value of all the common areas at any given time. By maintaining a ‘healthy’ level of reserves a HOA or condo reserve fund limits the risk of needing to ask for addition funds (special assessment) from its members. A special assessment is a worst case scenario, although without the funds being available, homeowners will be expected to come up with the money needed to pay for their proportional share of the repair or replacement cost if they have the money or not. It should also be noted that the value of a reserve related project can run anywhere for thousands to millions, so it is wise to keep an eye on how well an association is trending (percent funded) towards saving for anticipated costs.
Associations which have a weak or low HOA reserve funding percent can address the issue with a few decisive decisions. The HOA reserve funding level can be dramatically impacted by a change in how members view the cost of living in the community. By highlighting the true of cost of maintaining the community, members become more accepting of the actual cost of keeping their community in good working order. Transparency and understanding will work in the associations favor and give members an idea of where their money goes and the cost of keeping the community’s common areas.
The HOA or condo reserve fund is a simply way in which to outline and the needs of the community and the associated cost. By updating the information on a regular basis, the Board of Directors and members can track and monitor their performance of their association on an on-going basis. The HOA reserve funding percent funded calculation will be the best indicator of how well an association is financially prepared for the future. By keeping everyone on the same page with the management of the physical and financial health of the community, an Association can go far and reach its goals in both the short and long term.
Good, accurate and independent information is the best means of helping ‘move the needle’ and giving association’s the chance to raise the funds they need for the betterment of their community. A professional reserve study is the cornerstone of any community financial plan and should be view as an essential element in understanding where the association is today and where it wants to go in the future.