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Homeowner Associations (HOAs) are responsible for the maintenance and upkeep of the community's common areas, amenities, and facilities. To ensure that the community is well-maintained and financially stable, it is essential for HOAs to establish a reserve fund. In this blog post, we will discuss the importance of having a reserve fund and how it can help prevent financial issues for HOAs.
What is a reserve fund?
A reserve fund is a separate account that is set up to accumulate funds for major repairs and replacements that are not part of the regular budget. It is also known as a capital reserve fund. The fund is typically funded by regular contributions from the HOA's operating budget or through special assessments. The reserve fund is used to cover the costs of major repairs and replacements, such as roof replacements, painting, or major equipment repairs.
Why is a reserve fund important?
Having a reserve fund is essential for the financial stability of the HOA. It helps prevent financial issues that can arise when unexpected expenses occur. Without a reserve fund, HOAs may be forced to use operating funds or special assessments to cover the costs of major repairs and replacements. This can cause financial strain on the community and lead to increased fees or assessments for homeowners.
Establishing and maintaining a reserve fund is a prudent financial strategy that can help ensure the long-term financial stability of the community. The reserve fund can also help improve the community's property values, as it demonstrates a commitment to maintaining and improving the common areas and amenities.
How much should be in the reserve fund?
The amount that should be in the reserve fund depends on the age, condition, and expected useful life of the community's assets. The Community Associations Institute (CAI) recommends that HOAs should have a reserve fund that covers at least 70% of the expected expenses over the next 30 years. This can help ensure that the community is financially stable and that unexpected expenses can be handled without causing financial strain on the community.
How to establish a reserve fund?
Establishing a reserve fund can be a complex process that requires careful planning and management. HOAs should work with a qualified financial advisor or HOA management company like Liberty Allied Management to help establish and manage the reserve fund. The following steps are involved in establishing a reserve fund:
1. Reserve Study
The first step in establishing a reserve fund is to conduct a reserve study. A reserve study is a comprehensive evaluation of the community's assets, including their condition, age, and expected useful life. The study also includes an analysis of the estimated costs of repairs and replacements.
2. Reserve Fund Plan
Based on the reserve study, the HOA can develop a reserve fund plan that outlines the contributions required to fund the reserve fund. The plan should include a funding strategy that outlines the amount of contributions required each year to ensure that the reserve fund is adequately funded.
3. Regular Contributions
The reserve fund should be funded regularly to ensure that it has sufficient funds to cover unexpected expenses. The contributions should be included in the annual operating budget and be funded through regular assessments or special assessments.
4. Reserve Fund Management
The reserve fund should be managed separately from the operating budget. The reserve fund can be invested in low-risk investments to gain more capital when the need arises. However, low risk is still a risk. To ensure that the funds are available when needed, Liberty Allied recommends working with one of our strategic partners or not investing these funds at all, or utilizing a federally secured savings account that provides minimal but some form of return. The reserve fund should also be reviewed regularly to ensure that it is adequately funded and that the investment strategy is appropriate.
In Conclusion
By establishing a reserve fund, HOAs can ensure the long-term financial stability of the community and maintain and improve the common areas and amenities.
Having a reserve fund also provides peace of mind for homeowners, knowing that unexpected repairs and replacements will not lead to financial strain on the community. It also helps maintain property values and makes the community more attractive to potential buyers, as they know that the community is financially stable and committed to maintaining and improving the common areas and amenities.
HOAs should also communicate regularly with homeowners about the reserve fund and its purpose. Homeowners should understand the importance of the reserve fund and how it contributes to the financial stability of the community.
Do you want long-term financial stability for your community and provide peace of mind to your homeowners? Reach out to Liberty Allied today!
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