How to Build HOA Reserve Funds
A large responsibility of the HOA is to operate, maintain, repair, and replace all common areas within a development. Because these areas are available for use to everyone within the community, HOA funds are used for any expenses that may ensue.
As set forth in the governing documents of an association, the HOA must keep some money set aside for unforeseen expenses. This money is often referred to as the HOA reserve, cash reserves, or reserve account. The funds collected and set aside in this account are for unexpected expenses that may be large and/or infrequent.
So, how much money should be in your HOA reserve, and what is the best way to boost your HOA reserve balance?
How Much Money Should be in Your HOA Reserve?
An HOA generally hires an outside accountant to prepare a reserve study. Through the reserve study, experts are able to determine likely costs and repairs for the association’s property. In addition, they will identify repairs and/or replacements that may need to be made to common areas over the next 20 to 30 years. For example, if a reserve study is anticipating the pool to be resurfaced within the next 10 years, the estimated cost will be spread out over this time period and the HOA will collect enough money to be set aside each year in the reserve fund for the large expense after 10 years.
When no reserve funds are available, there will be higher and special assessments to the homeowners. Some members may not be able to afford the large amounts due at any one time.
Both special assessments and raised assessments are a reflection of poor planning by the HOA and penalize current homeowners. It’s much more efficient to plan accordingly and maintain a properly managed reserve fund.
A reserve fund must always be kept properly funded to reduce the risk of imposing special assessments. An HOA may be tempted to dip in to reserve funds for periodic maintenance and ongoing expenses, but this is not advisable, as it puts the community at risk of having an additional assessment should any unforeseen issues arise. Some states have even gone so far as to enact legislation in regard to this problem. Whether or not your state regulates a reserve fund, you should be aware of the HOA’s plan to deal with any large, budgeted expenses.
What is the Best Way to Boost HOA Reserves?
There are many different ways for an HOA to boost reserve revenue:
Payment Options:
Delinquency rates of HOA assessments have a huge impact on the management of reserve funds. One of the most important ways to increase and maintain revenue is through the reconciliation of accounts and collection of past due balances.
If HOA assessments remain unpaid, the value of property within the community depreciates, and it can be more difficult to qualify for mortgages and refinance community assets. By decreasing the cost of collections or legal intervention and offering more payment options, you can increase the association’s revenue.
Is your HOA still accepting payments via check? The operating costs of processing check payments can add up! In fact, it can cost an association up to $10 per check! By accepting checks for HOA dues, it inevitably lowers your monthly revenue.
If checks bounce, or if homeowners are late on making payments, the problem compounds and leads to an even greater increase in operating costs. By offering an electronic payment option, many of the costs associated with checks are eliminated and a more accurate, effective solution is in place.
Electronic payments are more likely to be made on time because homeowners can set up automatic payments. In addition, homeowners can make payments from a mobile device from the comfort of their own homes. Residents can also have the option of scheduling payments in advance and eliminating the risk of late payments. These options will allow homeowners to contribute in a more timely manner that will, in turn, lead to higher revenue each month. The implementation of an electronic payment system can be made seamlessly and keep your HOA running smoothly.
Renting Out Unused Space:
If you have unused space within your community (such as a clubhouse), you can generate additional revenue by renting it out to residents or businesses for private parties, meetings, or personal gatherings. Consider your governing documents for specific guidelines and check with your association’s legal counsel to review insurance coverages prior to proceeding.
Revenue-Generating Activities:
Hosting events for community members, such as a movie night, barbeque, or pool party are great ways to get the residents involved! This is also a way for you to generate additional revenue for the HOA. Charging a small fee for participants can be a source of making good money and, as participation increases, you may decide to add more events throughout the year. Keep in mind that you want to balance the cost of hosting events with the revenue you’re bringing in.
Ad Space:
Does your association send out a community newsletter? Homeowners or local businesses may be interested in space to advertise their business or services! Selling ad space is a creative way to generate more income while also promoting local businesses. New homeowners may be interested in local restaurants, doctors and/or dentists, home improvement services, etc. Finding this information in a community newsletter is convenient and can be a great source of income for the HOA!
Go Green:
Just because you’re offering a newsletter, it doesn’t have to be a paper one! Consider implementing more electronic communications in place of paper. The cost of paper adds up, and it’s important to be more resourceful than wasteful! Go paperless whenever possible. The money the association saves on paper and printing costs can go toward the reserve fund.
Maximize HOA Space:
Use the common area parking lot for food trucks to come in once a quarter, or host a farmers market. You can also invite mobile pet groomers or fitness instructors who pay a fee for access to your community. Residents will enjoy the benefits of having closer access to the vendors, and vendors will appreciate the proximity to their customers. Before proceeding with these services, the board will need to review governing documents to ensure that there are no provisions which prohibit such acts. Furthermore, the association should consult with legal counsel and verify that proper insurance coverages are in place, as well as reviewing all contracts prior to signing.
Managing your HOA reserve properly is essential to the success of your community. By implementing some of these ideas, as well as having a clear understanding of what the needs of the association are, your board can ensure preparedness for a ‘rainy day’ when those unexpected or large expenses occur. For more information on managing your HOA community, be sure to sign up for our HOA board member certification courses.
