HOA Reserve Funds: When You Should (& Shouldn’t) Use Them

If your homeowner's association is looking for a way to cover the financial responsibility associated with maintaining their community – even in the face of disaster – it is a good idea to have a fund in place to do so. This fund is usually referred to as an HOA reserve, and it helps make life a little easier and less stressful when things inevitably cost money during the lifespan of your community organization.

What is the HOA Reserve Fund?

When an emergency happens, many homeowners rely on the money they have previously saved “for a rainy day” to take care of the related expenses. This could be something as mundane as repairing the plumbing after fifty years of use or as serious as replacing a damaged roof after a tornado or hurricane. Regardless of the circumstance, it is always easier to handle if there is money waiting in reserve to draw from.

That is the basic concept of a reserve fund for the homeowner’s association. These funds are established and maintained to ensure that needed repairs, replacements, or maintenance tasks are covered. The responsibility of supplying the funds falls to members of the homeowner’s association who live in the community – but figuring out how much they should be socking away is not as easy as it sounds.

How Does the HOA Board Create and Maintain the Fund?

Determining how much money is needed to create and maintain an HOA reserve fund can be a tricky task. There are many factors that go into the process, including determining how much might be necessary for various repairs and maintenance in the years to come, as well as what fees community members can reasonably pay. To make sense of all of this and create a functional funding system, it pays to work with a company that provides HOA reserve studies.

A reserve study is a process by which industry experts carefully examine the property and documents regarding its construction, safety, and other factors to determine how much money should be tucked away for its maintenance. Some of the factors they consider include:

• The age of the building or buildings on the property.
• The climate and weather that are typical for the area, as well as any potential risks such as storm damage or other natural disasters.
• How recently repairs or other maintenance work was conducted on the facilities, and more.

These factors help these professionals to determine what repairs or upgrades may be necessary for the next five, ten, or twenty years. Then, that total is broken down across the months or years to determine how much residents living in the community under the HOA will be responsible for paying by way of HOA dues. This way, community and HOA board members can budget accordingly and create a monthly or annual payment system that keeps the fund properly supplied and ready if it is needed.

What is Appropriate Usage of the Fund?

It is important to remember that the reserve fund is not to be used for the same expenses that are covered by your operating fund. The operating fund covers everyday expenses, such as insurance premiums, security services, and community management costs. If you think it is time to dip into the reserve fund, you have a few criteria to meet first.

Three criteria to consider when determining whether an item can be covered by your reserve fund include:

• Non-capital investment. This means that the expense is not for things like new items, structures, or unnecessary improvements.
• Non-recurring. Recurring expenses must always be covered by your operating fund.
• Needed for repairs, replacements, or to cover basic upkeep necessary to make the community comfortable and safe.

If your project meets these requirements, it is probably time to pull from your reserve fund. After all, that is what it is there for!

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Comment by muslimastrologers on July 22, 2021 at 1:42pm

This is an excellent providence. It really makes a good point out of it.
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