A wise person once said, an ounce of prevention is worth a pound of cure - a little precaution before a crisis occurs is preferable to a lot of fixing up afterward. Therefore establishing, budgeting and funding your reserve account is very important to proper HOA financial management. The reserve account consists of funds put aside – in reserve – for the replacement of major components of a community’s common property. For example, damage to tennis courts, a swimming pool, the clubhouse or a common drive can be costly to repair in a pinch. That is why it is so important to plan for these amenities and their eventual maintenance and replacement. There are many reasons why properly funding a reserve account are a top priority, including:
- Meeting state, fiduciary, and professional requirements
- Planning for the replacement of major items
- Equalize the contributions of old and new owners to fairly balance the cost of replacement
- Minimize the need for any special assessments. Some owners are on fixed incomes.
- Enhance resale values
A Reserve Study
The reserve study is used to develop a reserve account budget. This study examines all major common areas and components of the property under the care of the association. It is highly recommended that larger communities (200+ units) engage a Reserve Specialist every 3 to 5 years to property plan. The Reserve Specialist is a special industry designation awarded to qualified industry specialists who help prepare the budget as accurately as possible. The benefits of a thorough study include:
- Satisfying the fiduciary responsibility of the board
- Meet state sanctioned requirements
- Reduce liability
- Save time and money down the road
- Communicate the priorities to the owners
- Identify maintenance issues that have fallen through the cracks unnoticed
Remember, budget for reserve funds in advance and stay ahead of the game. No one likes surprises, and too many special assessments can ruin a boards credibility with the owners.