Living in a community gives you so many benefits and the most important one is when you don’t have to take care of the repair and maintenance on your own. The community makes a homeowner association that takes care of the wellbeing of the members as well as maintenance and repair of the assets of the community. This sounds such a great idea as it makes you burden free, but the thing is: an HOA needs sufficient funds to power this idea.
Obviously, the association needs money to repair the leaking roof of the fitness club or to add swings to the park. It’s easy to manage things with some funds if things go smoothly and the HOA has to manage one issue at a time. But unfortunately, this isn’t the case all the time. Sometimes, unexpected issues emerge simultaneously that can take a serious dig on the community if the HOA doesn’t have sufficient funds.
Conduct a Reserve Study to Stay Safe
Before knowing why an HOA should keep a reserve of funds and how it can impact if an HOA runs out of the funds when needed, it’s important to know how you can avoid unexpected expenses. The simple answer to this question is: HOA management company.
A reserve study is the analysis of the common property of the community to estimate when these components will require repair. This study also gives a tentative estimation of the funds required to repair and keep all assets maintained. That’s why some states have declared it mandatory to conduct a reserve study for an HOA. But even if your state law doesn’t bind you to do a reserve study, the HOA should itself take care of it once in 2-3 years to avoid any future problems.
How an HOA Gets Funds
The homeowner association doesn’t get money from the state or any other outside body. Obviously, the HOA works for the betterment of the residents of the community, so it collects money from the homeowners of the community. And homeowners are bound to contribute in developing a reserve of funds.
The amount of funds collected depends on the annual budget made based on the ongoing maintenance projects, estimation of the upcoming future maintenance requirements, and what are the duties of the HOA. For example, some HOAs only take care of the maintenance of the common property, like clubs, sports complexes, swimming pools, parks, etc. Whereas, some associations are also responsible for paying security and streets cleaning staff. So, the amount of funds collected depends on all these factors.
Need of Reserve Funds
Collecting funds for a community is just like life planning. You make a retirement account or personal saving account and put some money in these accounts to use them on rainy days. Similarly, an HOA should have reserve funds to cater to the whole repair and maintenance needs. But the question is how much money should a reserve fund have? Should you collect money according to the estimation made in the reserve study? Would that amount of money be enough? The answer is: no!
Remember that a reserve study only gives an estimation after the analysis of the property and assets. It doesn’t give the exact amount of money required. So, what will happen if an unexpected repair requirement comes? The HOA will not have sufficient funds, so it will likely have to increase dues or take a loan. Both these conditions will put a burden on the homeowners as they will have to manage money outside of their budget to overcome the issue. So, it’s better to keep the reserve funds updated with enough money to manage unexpected repair and maintenance requirements.
The best way to keep things smooth and steady is to keep the reserve funds. The collection of dues shouldn’t end after collecting a particular amount of money. It’s better to develop a strategy, take homeowners in confidence, tell them the situation, and periodically collect money from them. Not to forget that the amount collected should be raised with time according to the changing economy and the change in the rate of things. It’s the best way to keep an HOA working smoothly and repair and maintenance work going steadily.