Reserves for homeowner associations are funds set aside for future capital improvements or repairs. The purpose of reserve funding is to ensure that the future expenses are paid by those who enjoyed the benefit of the capital item. A reserve study is a formal review of the capital items and related infrastructure of the HOA. These studies are typically prepared by engineering firms or companies that specialize in preparing reserve studies.
“Why do we need reserves?” This is a common membership question. The membership perception many times is that money is being taken out of their bank account and just put into the HOA’s bank account. Alternatively, another common membership view that they will not be living within the HOA when the reserves will be needed.
Everyone has heard of the immutable laws, gravity, vibration, and so on, but there needs to be another, the law of reserves. Alternatively, at least the membership should understand the basics of why reserves are necessary. There are four fundamental reasons why reserve studies and funding reserves are vital to the wellbeing of an HOA.
1-Aging HOA: Properties age. While this may seem like an obvious point, it is not. It could possibly be because that this is such an obvious point it is overlooked. Compounding this is, when members are not involved in the maintenance of the association, they may have no frame of reference on the issue.
2-No Free Lunch: Someone must pay. This may seem like another obvious point, but this is by far the most common perception of some in the membership. A variation on this line of reasoning is that all the association will have to do is take out a loan. Another belief is that there is a government program that can take care of this problems.
3-The Board is Responsible: As any board members know, they are ultimately responsible for the homeowner association. This includes funding reserves to the best of the association’s financial abilities. Part of a board of directors’ responsibility is to maintain and protect the association. This protection not only includes the physical elements, but the financial wellbeing of the HOA.
4-Deferred Expenses Tend to Multiply: There are two factors affecting deferred maintenance and repairs. First is inflation and the other is the cost of additional damage caused by failing elements. Inflation is self-explanatory; costs tend to rise over time. The expense of further damage can be the most expensive aspect of deferred maintenance. The best example is a worn-out roof that needs to be replaced and, if there are no reserve funds, roof patching is the next alternative. Patching a worn-out roof is self-defeating because the roof is still going to have to be eventually replaced.