Understanding The Purpose Of HOA Reserve Funds & Efficiently Managing Them

One of the main concerns of homeowners’ association board members is comprehending, “How much funds should an HOA have in reserve?” Similar to businesses and large organizations, an HOA Reserve Fund can help the association financially deal with future developments and expenses. The reserve fund can help the association conveniently deal with unexpected financial expenses. In this article, we discuss the function of the homeowners association reserve fund and provide some suggestions for best practices.  

The Difference Between HOA Reserve Funds & Operating Funds

HOA finances consist of mainly two types of accounts, the operating fund, and the reserve fund. The daily expenses of the HOA are managed by using resources from the operating fund. Some of these expenses include but are not limited to office and legal expenses, maintenance & janitorial services, security, and payment for property management. In a majority of cases, the operating funds are used to replace or repair worn-out or dysfunctional equipment within the HOA premises. 

HOAs are especially strict about how the resources in the reserve fund are used by the board. The board members must follow all of the association’s rules and regulations which include the bylaws and accountability whenever money from the reserve fund is used. This is why these funds are primarily used for expenses that do not occur on a regular basis. Some examples of when money from the reserve fund might be used are to pay for new equipment or facilities in the community center, fencing projects, or new equipment for the streets and driveways within the community. 

The Importance Of A Reserve Study

A reserve study is a process by which an HOA can find out exactly how much funds should be present in their reserve fund at any time. A reserve study identifies the HOA’s overall monthly and yearly budget which includes running costs and anticipated costs. The reserve study takes into consideration that there might be some unexpected expenses that are mandatory to update the current facilities and equipment within the HOA. The reserve study is often conducted with the help of accountants or property managers associated with property management companies. 

These professionals often have a better understanding of the current and expected costs of property-related expenses in connection to the present market and associated costs such as inflation and interest rates. The accountants and property managers work in coordination with the HOA board to ensure that the study is personalized according to the HOA’s specific requirements. HOAs should conduct a reserve study periodically within a time frame of every four to seven years. This is because the costs associated with repairs and replacing existing equipment also changes within this timeframe. 

Maintaining Optimal Resources In The Reserve Fund

The resources in the reserve fund are crucial to maintaining the preservation and sustaining of the expenses of the HOA society. The board members should be responsible to make sure that there are sufficient funds in the reserve fund. The board members should strive to accumulate 100% of the funds identified by the reserve study. For some HOAs this might not be practical for various reasons, in such cases having 80% of the funds identified by the reserve study is also an optimal solution for the HOA board.