If you are part of a condo board, condo Homeowners Association (HOA), or are shopping for a condominium, you’ll want to be familiar with what a condo reserve fund is. The term has been around since the 1980s, when the reserve study industry was born.
So what is a reserve fund, and how is a condo reserve different?
Here is what you should know about a condo reserve fund.

What is a Reserve Fund?

A reserve fund is an account for maintaining a sufficient budget for future property repairs and replacements of a condominium.

Why is a reserve fund necessary?

Condos need regular maintenance to preserve their condition and value.
Essentially, there are operational and future expenditures.
That means it is an investment you’ll want to make to preserve your condo’s pristine condition and potential for value appreciation.
Operational costs cover daily or seasonal expenses such as administration, outdoor lighting, landscaping, plumbing, insurance, and legal fees.
On the other hand, future expenditures refer to significant renovations of shared assets, such as pools, car parks, and recreational facilities.
Property management keeps a reserve fund to pay for the repairs and replacements of these common facilities.

How Does a Condo Reserve Fund Work?

The condo board hires a professional to conduct an analysis of the property. Call it a capital budget advisory service.

The study is referred to as a reserve fund study. It makes an accurate projection of how much and how long repairs and replacements to the condo and common assets as a whole would take.
The goal is to identify when certain items will deteriorate and how much it would realistically take to repair them. Some items might require full-on replacement.
The reserve study specialist recommends the amount of money the board should deposit over time. That way, the expense will never come as a surprise.
A reserve study's results will help you tell how much you or your community needs to contribute over time to raise the sufficient amount for future or emergency repairs.

Your State Law may Determine the Reserve Fund Amount

Some states require full funding for the reserve fund.
Supposing that is the case in your area, your condo board or HOA will need to comply with the law. All members need to contribute a specified amount to ensure that the fund covers 100% of future expenditures.
If your state does not regulate reserve funds, it is good practice to maintain 70% of the recommended amount.

A Reserve Fund may not be Adequate

Keep in mind that a reserve study specialist uses knowledge and expertise to project expenditure. The projections may be inaccurate due to situations such as:
• A condo’s poor maintenance where components reach the end of useful life earlier than expected
• Emergency repairs and replacements that deplete money quickly than projected
Hence, ensure that you use the reserve fund study as a guide.

Secure the Reserve Fund

A reserve fund is a contribution from many people for significant projects. You do not want to lose the money. Ensure that;
• There are at least two signatories to the account.
• Withdrawal of money has a board’s resolution.
• The reserve fund is separate from the operating account.
• The money is in a secure account, such as government-backed accounts.
These security checks safeguard your investment.

Bottom Line

Condos require occasional maintenance to preserve their value and attract buyers.
The management should ensure that there is enough money for future expenditures. To help with that, proactive boards and HOAs hire a reserve fund specialist to estimate shared assets’ end of useful life and costs of repairs and replacements.
Something else. Always double-check with your state laws to see how they regulate the condo reserve funds.