What Is A HOA Reserve Fund?

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Every community association has an HOA reserve fund. The community’s governing documents may even require it. But what is an HOA reserve fund anyway? What is it used for? Let’s find out.

What Is the Purpose of a Reserve Fund?

Every HOA board has a fiduciary duty to the community to maintain the common areas, enforce the rules, and keep the community financially healthy. However, even if the board regularly collects HOA funding through assessments, operational funds often cannot cover the cost of unexpected expenditures. 

These expenditures usually arise from emergencies. For example, a hailstorm might have destroyed the roof of the community clubhouse. The HOA usually only budgets for regular maintenance, so that a major roof replacement might be out of the budget. 

In this case, the board has to dip into the HOA reserve account to cover the cost of repairs. The HOA reserve fund acts as a savings or emergency fund for the community. It’s used when the HOA is in dire need of funds. The funds allow the HOA to avoid levying special assessments that might be financially burdensome for the residents. 

What Can HOA Reserve Funds Be Used For?

HOA reserve funding can be used for several reasons, not just emergencies. Typically, homeowners associations can use the reserve funds for non-regular expenses. This includes, but is not limited to, the following: 

  • Emergency repairs after a disaster or crisis
  • Completing major landscaping or capital improvement projects
  • Constructing new capital improvements (e.g. community playground, gym)
  • Replacing major parts, fixtures, and common elements (e.g. pool pumps, sidewalks)

Is an HOA Reserve Fund Required?

HOA reserve requirements vary per state and association. In some states, HOAs must maintain a reserve fund. For example, the state of Illinois requires HOAs to maintain reasonable reserves for capital expenses and deferred maintenance. 

Apart from state law, the governing documents may require homeowners association reserves. It’s important to review the HOA’s governing documents to verify whether or not the board needs to budget for reserves. 

How Much Do HOAs Need In the Reserve Fund?

The amount each HOA will need in their reserve funds varies. Typically, HOAs conduct a reserve study to determine how much they must keep in the reserve funds. The HOA includes this in the budget and allocates some regular assessments to the HOA reserves. 

Should the reserve fund always be fully funded? It depends on your HOA reserve fund policy and state requirements. Ideally, homeowners associations should keep their reserve accounts fully funded. The community can cover all anticipated costs with a fully funded reserve account.

However, it’s usually difficult to keep the reserve account fully funded all the time. As a general rule, HOAs should strive to keep the reserve fund at least 70% funded. Going below 70% will expose the HOA to financial strain, leading to special assessments. The community may be hard-pressed to come up with the money on such short notice. 

What Is an HOA Reserve Study?

An HOA reserve study is an HOA reserve fund planning tool that allows the HOA to determine how much it needs in reserve funds. Often, it includes an inspection of the HOA’s infrastructure and assets to determine their current condition. Based on the findings, the HOA can determine when these fixtures will need repair or replacement and how much it will cost.

In addition, an HOA reserve study includes a financial assessment and evaluates the HOA’s current financial stability and health. It examines the present state of the homeowners association reserve fund, collections, delinquent accounts, and financial statements to verify whether the HOA can meet these expenses.

What Happens If the Reserves Aren’t Funded?

Unfortunately, many homeowners’ associations neglect their reserve funds to keep assessments low. However, insufficient reserve funding has several consequences. Firstly, the HOA might suddenly increase the HOA fees to cover the cost of emergency repairs. Alternatively, they might levy heavy special assessments to avoid increasing regular dues.

Some associations might also resort to seeking external funding sources. They may obtain loans with high-interest rates just to get by. However, this is often a bad idea in the long term as it can put the HOA in further financial trouble. 

Apart from these, the HOA may give up entirely and leave their common areas in disrepair. Doing so could reduce the residents’ quality of life and even pose a physical threat to them. HOA amenities like gyms or pools will become unusable. Worse yet, foundational structures and facilities like roads or sidewalks might become impassable. 

HOA Reserve Fund Management: How to Stay Prepared

If your community hasn’t been properly maintaining its reserve funds, don’t worry. It’s never too late to start now. Here are a few tips to keep in mind to manage your reserve funds and stay prepared for emergencies.

  • Seek Professional Help. If the HOA board doesn’t know how to manage the reserves, they can seek professional help from HOA management companies to help them get started. 
  • Conduct a Reserve Study. The best way to determine how much you need in your reserves is by conducting a reserve study. Once you have a financial goal, you can take small steps to achieve ample funding.
  • Make Incremental Increases to Assessments. HOA assessments will inevitably increase to fund the reserves, but they don’t have to increase dramatically. Consider making incremental increases to the operating budget over time.
  • Communicate With Homeowners. Remember to be transparent with the homeowners about the increases and let them know why an HOA reserve fund is necessary. 
  • Monitor Common Areas. Always keep an eye on common areas to spot potential problems early.
  • Conduct Preventive Maintenance. HOAs should have routine maintenance for all their common areas and assets to reduce future repair and replacement costs. 

Emergency Funds for Rainy Days

An HOA reserve fund is essential for keeping communities financially healthy. Without a properly funded reserve account, you risk being unable to pay for necessary repairs. The board has a fiduciary responsibility to the community, and maintaining a reserve fund is in their best interest.

88 Doors provides HOA management services to communities. We can help you conduct a reserve study and manage the HOA reserves. Call us now at (512) 348-8821 or contact us online for more information!