6 Steps to Determine How Much Your HOA Should Have in Reserve
Homeowner’s Associations (HOAs) play a crucial role in maintaining the safety, appearance, and value of a community. One of the key responsibilities of an HOA board is to manage the community’s finances and ensure that there are adequate funds available to cover expenses, maintenance, and unexpected events. An important part of this is having a well-planned and well-funded reserve account. In this article, we will explore the steps for determining how much money an HOA should have in reserve.
Step 1: Establish a reserve study
A reserve study is an important tool that helps the HOA determine how much money it should have in reserve. The study should take into account the community’s expenses, assets, and long-term goals, and provide a clear and detailed plan for how much money the HOA should set aside each year to build its reserve fund.
Step 2: Determine the community’s expenses
The first step in determining how much money an HOA should have in reserve is to determine the community’s expenses. This includes recurring expenses, such as maintenance and insurance, as well as unexpected expenses, such as repairs and replacements. The HOA should have a good understanding of these expenses, as well as an estimate of how much they will cost in the future.
The HOA should also consider the community’s assets, including common areas, facilities, and any other property that is owned by the HOA. The HOA should have a clear understanding of the costs associated with maintaining these assets and ensure that there are sufficient funds in reserve to cover these expenses.
Step 3: Set aside enough funds for emergencies
The HOA should have sufficient funds in reserve to cover unexpected expenses, such as repairs and replacements. The exact amount of money that should be set aside will depend on the size of the community, the type of assets that are owned, and the level of risk associated with those assets. A well-funded reserve account will help the HOA to quickly respond to emergencies and minimize the impact on residents.
Step 4: Balance reserves and special assessments
It is important for the HOA to maintain a balance between the amount of money it has in reserves and the amount of money it is able to collect through special assessments. While having a well-funded reserve account is important, the HOA should also consider the financial impact on residents and ensure that it is not collecting more money than it needs.
Step 5: Be transparent with residents
The HOA should be transparent with residents about its finances and the purpose of the reserve account. This includes providing regular financial statements, allowing residents to view the budget and reserve study, and answering questions about the HOA’s financial management.
Step 6: Regularly review and adjust the reserve fund
The HOA should regularly review its reserve fund and adjust it as needed. This includes reviewing the community’s expenses and assets, as well as considering changes in the economy, housing market, and other factors that could impact the community’s finances.
There are several formulas that a Homeowners Association (HOA) could use to determine how much money it should have in reserve. Here are some of the most common ones:
The Percent of Budget Method: This method involves setting aside a percentage of the HOA’s annual budget for its reserve account. The percentage varies based on the type of expenses and assets the HOA is responsible for, as well as the age and condition of those assets. A common percentage used for this method is between 10% and 20% of the annual budget.
The Per Unit Method: This method involves calculating the cost of each asset that the HOA is responsible for and then determining the amount of money that should be set aside for each unit. This approach is particularly useful for multi-unit properties, such as condominiums and apartments, where each unit is responsible for a portion of the HOA’s expenses.
The Age-Life Method: This method involves determining the expected lifespan of each asset that the HOA is responsible for and then estimating the cost of repairs or replacements when the assets reach the end of their lifespan. The HOA then sets aside a portion of its budget each year to cover these costs.
The Unit Assessment Method: This method involves estimating the cost of all repairs and replacements that the HOA is responsible for and then dividing that cost by the number of units in the community. This method helps to ensure that each unit is responsible for its fair share of the HOA’s expenses.
The Reserve Study Method: This method involves conducting a reserve study, which is an in-depth analysis of the HOA’s expenses, assets, and long-term financial goals. The study provides a detailed plan for how much money the HOA should set aside each year to build its reserve fund, taking into account the cost of repairs, replacements, and other expenses.
Ultimately, the formula that a HOA chooses to use to determine how much money it should have in reserve will depend on its specific needs and the type of community it serves. The HOA should consider its expenses, assets, and long-term goals, as well as the financial impact on residents, when making its decision.
A well-planned and well-funded reserve account is essential for the long-term wellbeing of an HOA. The ground rules outlined in steps above can help the HOA determine how much money it should have in reserve, balance the needs of the community with the financial impact on residents, and ensure that the HOA is able to respond quickly to emergencies and unexpected events. By following these guidelines, HOAs can ensure that they have the resources they need to effectively serve their communities and maintain the safety, appearance, and value of their properties.
