Month: September 2022

Understanding the significance of HOA reserve funds is crucial for effective homeowners’ association management. These funds, unlike daily operating funds, are set aside for essential repairs and replacements within the community. This guide covers the importance of HOA reserve funds, smart investment strategies, and ensuring financial preparedness for the future.

HOA Reserve Funds: Why They Matter and Smart Investment Strategies

Managing an HOA requires understanding and effectively handling reserve funds. These funds cover major repairs and replacements of common areas, distinct from daily operating expenses.

Why Are Reserve Funds Essential?

Reserve funds ensure long-term financial stability, maintaining common areas like roofs, elevators, pools, and parking lots without sudden financial burdens. They also help preserve or enhance property values, keeping the community attractive and functional.

How Much Reserve Should an HOA Have?

Determining the right reserve fund amount can be challenging. A comprehensive Reserve Study estimates major repair and replacement costs. The Study assumes a conservative interest yield of 1-3% on reserve balances.

Every HOA has unique needs, so reserve fund requirements vary. A reserve study every 3 to 5 years helps the board allocate appropriate funds and anticipate potential cost spikes.

The Risks of Underfunded HOA Reserve Funds

An underfunded reserve fund poses significant risks to an HOA. Unexpected costs may force sudden dues increases or less efficient funding solutions. This could cause financial stress for community members and potential discord within the community.

Investing HOA Reserve Funds: Key Considerations

Choosing the right reserve fund investment requires considering return reliability, risk level, investment duration flexibility, and competitive interest rates. CDs offer guaranteed returns, low risk, and FDIC insurance up to $250,000 per depositor per insured bank. Their flexible investment durations and generally higher interest rates are additional benefits.

A Well-Designed HOA Investment Policy

For HOAs with substantial reserves, developing an investment policy is beneficial. This policy should outline financial goals, risk tolerance, and cash management procedures, including guidelines for permissible investments and approved financial institutions.

An effective investment policy should focus on Safety, Liquidity, and Yield (SLY). Before formulating the policy, review your association’s documents for any specific requirements.

Need Assistance with Reserve Funds? We’re Here to Help

If you want to learn more about managing your community association’s finances and making smart investment decisions, contact us. Our experienced team can help you navigate the complex world of HOA finances and ensure the long-term financial health of your community.

To create your HOA’s annual budget, review and follow the timeline for Board completion and approval. This ensures you meet the distribution requirements outlined in the HOA’s governing documents. For example, some CC&Rs require mailing or delivering the approved budget to homeowners 30 days before the effective date or year-end.

While keeping these critical deadlines in mind, consider the following items to help make the budget preparation process successful:

Review the governing documents

• Look for specific requirements for preparing and distributing the HOA’s budget.
• Be aware of any recent changes to State Statutes.

Be sure to prepare both

• An operating budget and a reserve budget.
• Include the final budgets as agenda items for approval during an open Board of Directors meeting.

Review the reserve study.

• Review governing documents to confirm if they require an annual reserve fund analysis.
• Determine how much money the association should have raised for replacement costs and other contingencies.
• Determine the percentage funded in reserve.
• Make sure you have planned for adequate cash flow for upcoming expenditures.

Analyze expenditures

• Pinpoint assets that may need replacement or upgrades for the current year.

Review existing contracts and anticipate fluctuating costs

• Contact utility companies to confirm their price rates for the following year.
• Reach out to active vendors and ask about service costs for the following year.
• Consider requesting RFPs from potential vendors.

Examine each category

• Projected Revenue – Assessments
• Operating Costs – Maintenance, supplies and utilities
• Fixed Costs – Taxes, insurance, status filing
• Administrative Costs – Bank fees, management, legal, website, office expenses
• Review each line item to account for increased costs. 

Necessary assessment increase

• Divide the total projected costs among the number of homeowners to determine whether an assessment increase will be necessary to cover expenses.
• Compare the recommended funding in the reserve fund to the current actual funding level to determine whether an assessment increase is needed.

Include a narrative

• Always include an explanation of how each income and expense item was determined.
• Financial prudence is one of your top responsibilities as a board member. This is why investing time and starting early on creating an annual budget will set your HOA up for financial success.

If you want more HOA budgeting tips, check out our Guide on 7 Tips to Prepare Your Community’s Association Budget.