Fully Funded Reserves - Is it Possible?
It’s well known throughout the HOA industry that a lot of associations don’t have enough money in reserves to cover the replacement of major components. An October 2013 report by Association Reserve showed, in an analysis of 30,000 reserve studies that 70% were underfunded. When you take into account the associations that have never had a reserve study — I am guessing that number goes way up.
The Cycle of Underfunded Reserves
If you manage communities you probably recognize the underfunded community a mile away. You know the one — it’s never had a reserve study, the shingles should have been replaced five years ago, there are a dozen pothole patches in the parking lot, and homeowner are upset claiming, “the HOA does nothing”.
If you’re a new board member this story may be a new one, and now, you and your fellow board members are faced with the difficult task of deciding what to do. Well, you have a few different options.
Comply with the reserve study and increase dues dramatically to stop the bleeding.
Plan out a series of special assessments to get in compliance with the reserve study
Ignore the reserve study, maintain the status quo, and plan to move before the property values start to fall.
Unfortunately too many HOA’s choose the last option, causing the cycle to continue.
The Result of Under-funding
In the short term it may mean that dues aren’t going up, and you don’t have to face the homeowners to tell them. But the real result will be realized in the coming years. They will come in the form of deferred maintenance, Increased maintenance costs on dilapidated components, and the inevitable special assessment or loan. Not to mention the angry homeowners, depressed property values, and potential lawsuit, for failure to fulfill your fiduciary duty.
It Is Possible!
Several years ago while managing HOA’s I helped a community implement a dues increase of 30% to fund their reserves. As you can imagine the board did not take this decision lightly, and neither did the homeowners. But — I can tell you that in just a few years their reserves are healthy, homeowners are generally pleased with the maintenance, and the doomsday claims that many homeowners said would come with increasing the dues, haven’t happened.
Getting your HOA on the right track isn’t easy, but, if you’re willing to make the hard decisions, do your research, and trust the professionals — You’ll be surprised how quickly you can turn things around. You may even be surprised how quickly the homeowners forgive you when they see the improvements around the community.