A reserve account, also known as a reserve fund, is essentially a savings account set aside by an HOA board to cover any unexpected expenses that have not been insured. According to studies, HOA Reserve Funds can be used when large scale projects are being undertaken. Having a reserve account is crucial as it saves the HOA from facing financial troubles. In most communities, an HOA reserve fund is the responsibility of an association’s board. How then can HOA reserve funds be better handled to cover any unforeseen events or natural disasters? This article provides some useful tips.
1. Conduct a reserve study
Reserve studies help the association determine the right amount that they need in the HOA reserve fund. A reserve study should be carried out by an audit firm or a consultant who can evaluate long-term expenses. It is essential to keep this information updated yearly to avoid any legal liability on your part as the HOA. According to CINC Systems, a reserve study helps the board create a solid foundation for developing their budgets.
2. Invest the Reserve Funds
Just as you would invest your money for better returns, the same applies to reserve funds. Instead of having the funds sit idle, find an appropriate investment where the money can grow and reach the required level. Seek professional help when looking for a sound investment and broaden your scope to know which one will give better yields. The investment should be risk-free, and all members should be consulted before such action is undertaken. The investment plan should also guarantee the safety of your member’s money.
3. Know When To Use Your Reserves
If your community has a basketball court that requires resurfacing after every five years, it will not be included in the annual budgets. But if it needs maintenance before the five-year period has elapsed, the HOA will have to dip into the reserve funds to use up monies that were not to be used up at that particular time. Reserve funds should be used for repairs and replacements. Recurring expenses should not be covered through a reserve fund. As a board member, it is vital to understand when to use the reserves. You will be protecting yourself from legal liability too.
4. Understand Your Correct Reserve Level
Ideally, reserve funds should be fully funded to manage any unforeseen circumstances. But this is not always the case. Most reserve funds are almost always underfunded, which can create a lot of risks to the communities. The HOA reserve rule of thumb is always to have the reserve fund at least 70% funded. This means that when something unexpected arises, the communities can quickly put together the 30% to cover the cost. A reserve study can determine the expenses that may incur long-term reasonably and, in the future, to give the board a better picture of the correct reserve level. Having the reserve level also helps the board members determine the funds they need to save each year to cover unplanned maintenance costs. This equally eliminates the need for a special assessment.
Reserve accounts shouldn’t be used just because something has come up. Instead, it should be a tactical move.