It’s important that all associations understand reserve basics. Homeowners’ and condo associations need to determine if their association needs to have a Reserve Fund. A Reserve Fund is similar to a savings account and is used to make major repairs or replacements at the end of a common element’s expected life. It’s purpose it replace or repair common elements which require irregular and costly expenditures far beyond what the operating budget could normally sustain.
Maintaining a Reserve Fund is usually not done by many small, self-managed homeowners’ associations. However, home buyers become more savvy and more cautious. Some states already require the seller to disclose information regarding the HOA’s reserves, assessment history and any pending special assessments. Resale values are enhanced in well-managed communities. Home buyers may decide on a house based on knowledge that a full replacement fund exists and that they will not be hit with a large special assessment shortly after moving in.
Take the example of an association that owns a swimming pool. There is regular maintenance that should be performed on the pool to keep it operating optimally. This maintenance should be a part of the annual operating budget as a planned expense. However, eventually the pumps will need to be replaced, or the pool resurfaced. The intent of a fully funded reserve account is that most or all of the money needed for replacement will have been collected by the anticipated replacement date. The purpose is to avoid special assessments that can be very costly to both the homeowner and the homeowners’ association. Having a replacement fund ensures that every homeowner pays “their share” for use of the pool. It isn’t fair that a homeowner could live in a community for several years and not contribute to the pool’s replacement costs, ultimately passing this expense on to the future homeowner who buys the home.
A knowledgeable HOA board knows that being prepared for these large, long-term expenses is part of their fiduciary responsibilitity. Even though building a reserve fund requires an increase in homeowner assessments, this is generally preferrable to each homeowner getting hit with a very large special assessment. If your community wants to develop fully funded reserves, there are many reserve specialists who can conduct a study for you. However, if you have very limited commonly owned elements, then your association can use a simple formula
- Itemize each common component
- Collect bids for full replacement cost for each component
- Divide this amount by the estimated years of life expected before you will have to replace the item
- Divide this amount by the number of homeowners in the association
- This is the amount you will have to collect annually from each homeowner.
Using the example where the community’s only common element is the pool:
The cost to replace the pumps and resurfacing is $60,200
It is estimated that the remaining lifespan of these items is 5 years ( $60,200/5 = $12,040)
There are 50 homeowners in the association ($12,040/50 = $240)
The annual household assessment is $240 per year or $20 per month.
Homeowners can pay $240/year and begin building reserves in preparation for replacing the pumps and resurfacing the pool. If the association neglects to build reserves, each homeowner will eventually be faced with a special assessment of $1,204.
Most HOA and condo governing documents require the members to vote for a Special Assessment. Even if the Board realizes that building a reserve fund is the responsible thing to do and is desperately needed, you will, in almost every instance, need a vote of approval from the membership. It is difficult to get a Special Assessment passed.Share