Keeping adequate HOA reserve funds is key to keeping your association’s finances healthy. If you don’t have enough, you may have to choose between levying assessments or delaying otherwise essential repairs.
What is the HOA Reserve Fund?
When discussing HOA finances, residents should be aware that the association maintains two accounts. The first, which is what most are familiar with, is the operating fund. The other is the HOA reserve account.
But what exactly is a reserve account? Think of it as the association’s savings account that may serve as a buffer, allowing the HOA to fund unplanned expenses or large-scale capital improvements. This account is funded by the HOA, which allocates a set percentage of the HOA dues collected each month.
Why Do HOAs Need a Reserve Fund?
Having an HOA reserve fund means your community is prepared for unexpected repairs and updates. Having this account is critical to an HOA’s financial health, and, as a best practice, it should always be up-to-date.
With sufficient funds in the reserve account, the community will have enough to cover emergency repairs and common-area upgrades. The funds are also easily and readily available with an established HOA reserved. It also eliminates the need to levy special assessments, which may take some time and some homeowner persuasion.
In some states, it is even required for planned communities, such as HOAs, to maintain a reserve fund. In Oregon, ORS 94.595 mandates that “a homeowners association shall establish a reserve account to fund major maintenance, repair, or replacement of all items of common property.”
HOA board members are responsible for managing the reserve funds as part of their financial obligations to the association. Part of that responsibility is anticipating and accounting for the items that the HOA reserves may use. Accordingly, under Oregon law, board members can also determine reserve account requirements after conducting or updating a reserve study.
What Can HOA Reserve Funds Be Used For?
Even if you can think of reserve funds as an HOA savings account, the money in it can’t just be used for anything. They can only be used for large-scale projects and repairs that protect the neighborhood and its residents.
Some of the things reserve funds can be used for include the following:
- Major Common Area Renovations: The HOA reserve can be used to fund essential, major renovations or upgrades to common amenities.
- Anticipated Asset Repairs and Replacements: The account can also be used to repair or replace items with a set estimated lifespan. Simply put, these are structural parts that don’t need replacement for years to come, but will still need to be replaced eventually. Some examples include road repavement and replacing roof tiles and siding.
HOA Reserve Studies
When creating or maintaining an HOA reserve account, how much does your association need to maintain?
Generally, HOAs don’t have a set amount for the reserve account. This would depend on several considerations, such as how many common assets the community has and how run-down they are.
Many board members would have a hard time determining all these and whether these assets can be supported by the reserve fund. They also have to account for when those assets need to be replaced or upgraded, as well as the associated costs.
To help your HOA with this, you need to conduct reserve studies. But what exactly is it?
An HOA reserve study is conducted to inspect HOA assets and the state of your finances. Part of this study is creating a long-term schedule for repairs and upgrades and estimating their potential costs. Part of that assessment also includes the extent to which those repairs are essential, when to perform them, and the estimated funds required over the next two to three decades. These would help the HOA board determine how to save and fund the HOA reserve.
However, do know that HOA reserve studies are not static. Instead, they should be updated and reviewed regularly, ideally every three to five years. For best results, the HOA can work with professionals who know the ins and outs of estimating repair costs and can help with financial planning.
With this in mind, remember that the HOA reserve study is not set in stone. It should not be treated as a static, rigid mandate. Instead, HOAs should use it as a guide and adapt over time.
Tips for a Healthy HOA Reserve Fund
To ensure that your HOA’s financial health remains stable for years to come, you also need to have a healthy reserve fund. Here are some tips you can follow.
The 70% HOA Reserves Rule of Thumb
Whatever the target amount your HOA reserve study has determined, always ensure that it is at least 70% funded. By doing so, you are ensuring that the association has sufficient financial resources to cover repairs and anticipated replacements without levying assessments.
Regular Reserve Studies
As mentioned previously, reserve studies are dynamic, and they should be reviewed and updated regularly. By doing so, you get more accurate assessments and estimates for upcoming expenses. It also helps adjust your funding target as the financial needs and goals of planned communities change over the years.
Consistent Allocation
As part of the HOA board, you are responsible for managing the HOA reserve, which includes allocating funds to the reserves every budget cycle. Make sure this is done regularly and consistently to meet the target funding percentage.
Adjust Contributions Every Year
During the annual budgeting process, review the state of your HOA reserve. Did a recent reserve study increase or lower the target amount? Does the account already account for over 70% of the target budget? Given these considerations, you can adjust how much you should allocate monthly in the coming year.
Consider Safe Investment Strategies
You can save your reserve funds in accounts that earn interest over time, as long as they comply with the HOA’s governing documents and state laws. However, make sure that these are low-risk investments to keep your HOA’s finances safe.
Practice Transparency
As with most aspects of running an HOA, be transparent with homeowners. Keep them informed about the HOA reserve fund’s status and let them know about future plans for its use.
Drawbacks of Underfunded HOA Reserves
Underfunded HOA reserves are something associations should avoid whenever possible. It poses significant financial risks to the community and has many drawbacks in both the short and long term.
The biggest drawback is the inability to cover emergency repairs. In the event of a disaster, without a healthy HOA reserve, you will not be able to cover the cost of essential repairs.
Outside of disasters, HOAs will not be able to cover upgrades that would prolong the lifespan of common amenities. Due to limited funding, HOAs will likely be forced to levy special assessments, which are usually unpopular among homeowners.
Staying Prepared
Having a well-funded HOA reserve fund means that your community is protected. It has a safeguard in place for large costs, both from unanticipated emergencies and anticipated upgrades. By working with a dynamic reserve, you ensure the community thrives for decades to come.
CWD Group offers HOA management services, including dues collection and payment management, to community associations in Oregon and Washington. Call us today at 503-488-2008 or contact us online!
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