Board members must understand and comply with the state of Washington HOA reserve requirement. Reserves enable associations to operate long-term without the need for large special assessments. They are a means to financially safeguard the association’s budget.
Is There a Washington HOA Reserve Requirement?
Yes, there are reserve requirements for associations in Washington state. These requirements are set by state laws that associations must comply with.
There are two main types of accounts an association maintains: operating and reserve accounts. The operating account holds the funds for day-to-day expenditures. These include everything from insurance premiums and maintenance fees to management costs and landscaping expenses.
On the other hand, the reserve account essentially acts as a savings account. It holds monies that the association saves for future major repairs and replacements.
Is an HOA Reserve Fund Required in Washington?
There is no statutory requirement for associations in Washington to fund reserves. That said, the law strongly encourages communities to do so, despite Washington having no HOA reserve fund requirements.
According to Section 64.34.304 (for condos) and Section 64.38.020 (for HOAs), associations may set up a reserve account. These establish the authority of associations to fund reserves, but there is no requirement to do so.
Section 64.90.535, which applies to common interest communities formed on or after July 1, 2018, requires that the association establish a reserve account. The board maintains control of this account.
Is an HOA Reserve Study Required in Washington?
As per Section 64.34.380, condo associations must prepare and update a reserve study unless doing so would impose unreasonable hardship on them.
The initial study must include a visual site inspection and be performed by a reserve study professional. Associations must update the study annually. Every 3 years, condo associations must conduct another update, including a visual site inspection by a professional.
Section 64.38.065 applies to homeowners associations. Under this law, HOAs must also prepare and update a reserve study, unless doing so would impose an unreasonable hardship.
Similar to the COA requirements, HOAs must perform an initial study with a visual site inspection. This must be completed by a professional. Every 3 years, the board must hire a professional to conduct another update, including a site inspection. In addition, the study must be updated annually.
Section 64.90.545 applies to common interest communities created on or after July 1, 2018. Under this section, associations must prepare and update a reserve study. A reserve study professional must complete the initial study with a visual site inspection and a review of the community’s plans.
Additionally, common interest communities must have a professional conduct a reserve study with a site inspection every three years. Annual updates must also be prepared.
Check Your Governing Documents
Apart from the Washington HOA reserve requirement, associations must also refer to their governing documents. Some CC&Rs and bylaws impose stricter requirements. In that case, the board must adhere to the documents.
HOA Reserve Funds: Everything You Need to Know
A reserve fund is a savings account that associations use to pay for major repairs and replacements in the future. A community’s common elements and components can deteriorate over time. When they reach the end of their useful life, the association can tap its reserves to cover maintenance costs.
Importance of a Reserve Fund
A reserve fund is essential to the continuous operation of a community association. Without it, an association would have no way of paying for major repairs and replacements. This will force the board to either:
- Delay maintenance and repairs, which would cause curb appeal and property values to plummet,
- Levy special assessments to cover the maintenance costs,
- Substantially raise dues to pay for the expenses, or
- Take out a loan.
How Much Should an HOA Have in Reserves?
There is no ideal dollar amount, as every association has different needs. The rule of thumb is to have the reserves at least 70% funded at any given time. To understand what a fully funded reserve looks like for an association, it must conduct a reserve study.
HOA Reserve Studies: Everything You Need to Know
A reserve study is a comprehensive planning tool that takes into account the association’s components and current financial health. The goal of a reserve study is to guide the board in saving for the future.
Parts of a Reserve Study
Reserve studies have two parts: the physical analysis and the financial analysis. Let’s discuss these below.
- Physical Analysis. This part of the study inspects the property’s common elements. A reserve specialist or engineer typically performs an on-site inspection, identifying all the association’s components and their condition. From there, they will estimate the remaining useful life of each component and the cost to replace it.
- Financial Analysis. This part of the study assesses the association’s financial condition. A professional will determine the current status of the reserve fund (if any) and take into account the association’s financial needs. From there, the professional will recommend a funding plan, including estimates of annual contributions to ensure sufficient funds over multiple years.
Types of Reserve Studies
There are three types of reserve studies: a full reserve study, an update with a site visit, and an update with no site visit. Let’s discuss these below.
- Full Reserve Study. A full study includes everything from an on-site inspection of common elements and a valuation of their useful life and replacement costs to a complete financial review of the association and a funding plan recommendation. This is the most expensive option and is typically done as an initial study (i.e., the association has never had one before).
- Update With Site Visit. This type of study is less comprehensive and less expensive than a full one, but still includes a visual site inspection of the components. The goal is to update the study to accommodate any physical changes. It is typically done every three years.
- Update With No Site Visit (Financial Only). This type of study is the least comprehensive and the most affordable. It is essentially an update that doesn’t include site inspections. It merely reviews the records, interviews key people, and makes adjustments in response to economic changes. Most associations conduct this annually.
Who Should Perform Reserve Studies?
Board members must hire a reserve specialist to conduct reserve studies. A study involves several moving parts and requires the expertise of a professional. For this reason, boards should never take it upon themselves to perform one unless a member is qualified to do so.
Professional Legal Help
Board members must understand the Washington HOA reserve requirement to ensure compliance. When in doubt, it is a good idea to seek assistance from a qualified professional, such as an HOA manager.
CWD Group helps community associations with reserve fund planning and reserve study management. Call us today at 503-488-2008 or contact us online to learn more!
