HOA Reserves: What Are They and Why They’re Necessary

The homeowner’s association (HOA) board is responsible for more than just creating a positive culture and community living environment. Board members are also responsible for managing finances and project funding. Managing funding properly isn’t just about paying expenses as they arise, it requires forethought and preplanning for what may happen or be necessary in the future. Many associations establish HOA reserves funds to help plan for these future necessities.

What is an HOA reserves fund?

An HOA reserves fund acts as a savings account for future community projects. The board members should include allocating money to the reserve in the annual budget to avoid a shortfall. To determine how much money should be assigned to the reserves, board members will often hire an outside firm to conduct a reserve study.

The reserve study creates a long-term list and schedule of potential costs and when they could occur in the next 20 to 30 years. To determine the amount that needs set aside each year, the study takes the predicted project costs divided by the perspective timeframe (i.e., five years) and calculates the total per year. This estimate is then included in the budget to calculate the annual dues for each homeowner.

Why HOA Reserves are Necessary

It might be hard for homeowners to understand why a board is charging for projects that aren’t yet necessary. Contributing to a reserve fund is highly important for both the HOA board and the homeowners.

1. Maintain Property Values
   One of the biggest benefits of living in a neighborhood under the care of a homeowner’s association is the rules and guidelines that help maintain property values. HOA reserves help assure that necessary community maintenance projects like replacing a roof or repairing playgrounds and swimming pools are possible. Through ongoing maintenance and care, homeowners have more selling power if they choose to move at a later time because property holds its value and curb appeal.
2. Avoid Special Assessments
   Special assessments occur when there is a shortage of funds, and big projects are necessary for the community. Many homeowners don’t understand or appreciate when special assessments take place. By assigning money to a reserves fund, these special assessments are less likely to occur.
3. Avoid Spikes in Annual Dues
   Having money allocated in an HOA reserves fund also helps minimize the chance of significant spikes in yearly dues because expensive projects have already been accounted for.
4. Minimize Potential Lawsuits
   When special assessments or increased fees occur, homeowners don’t always welcome the additional expenses. Some may decide to file a lawsuit stating the board did not handle their responsibilities appropriately. For board members, allocating money to HOA reserves helps prevent potential lawsuits alleging misallocation of funds from angry homeowners.

AR Management is a full-service property management company that assists homeowner’s associations with property management, customer service and administrate tasks. For more information on how we can help your HOA, contact our team today.