
Reserve Studies: A Guide for Community Associations
HOAs need reserve studies to knowledgeably manage communities, and they are required by law. With a little guidance, Boards can learn how to manage reserve funding and allocate community expenses.
Regardless of size, all California associations are required by California Civil Code §5550 to perform a reserve study. Using an independent, accredited, expert reserve study specialist is recommended in order to protect the Board from potential liability or criticism. A reserve study helps protect and boost your community’s market value. Your association’s ability to keep proper reserve funding creates positive effects on property values throughout your community. This financial approach becomes vital as buyers carefully examine the financial health of community associations before buying.
Your community’s market value improves substantially when reserve funding stays between 70% and 100% funded. This ideal funding range protects property values and reduces the risk of special assessments that could burden homeowners with unexpected costs.
Future owners appreciate that an association with adequate reserves means it’s less likely owners will be faced with special assessments. Meanwhile, current residents and future owners enjoy well-maintained facilities while seeing immediate gains through higher property values. Well-maintained common areas boost your community’s market appeal, which directly influences current property values and future resale potential.
Here’s how reserve studies affect your community’s market value:
- Communities that update reserve studies every five years see a 35.1% decrease in special assessments
- Associations that update every three years show a 28.5% decrease in special assessments
- Properties with well-managed reserve funds show better marketability and steady value growth
Reserve studies and property values share a deeper connection than just maintenance planning. HOAs reserve studies to tell potential buyers a compelling story about the property. Smart purchasers look at association fees and future financial stability before making offers. A professional reserve study gives these buyers the confidence they need and addresses worries about future fee increases.
Reserve funding of at least seventy percent (70%) makes prospective buyers more confident in making their best offers. Your property values might drop if reserves are underfunded, and buyers might look elsewhere. Your association’s steadfast dedication to regular reserve study updates helps the Board make informed decisions that meet regulatory requirements and community expectations. This forward-thinking approach shows current and future residents that your community values high standards of financial planning and asset management.
HOAs need reserve studies to allocate funding that creates a positive cycle. The community’s well-managed common areas attract quality buyers who help keep high community standards. Everyone using community assets pays their fair share to maintain them. This creates a lasting model that preserves value over time. Buyers look for communities with well-managed associations because they know their investment is safe.
FAQs About Reserve Studies
A reserve study is crucial for HOAs as it provides an updated estimate of the costs associated with the repair and replacement of significant common area components, such as roofs and pavements. The goal is to ensure that there are adequate reserve funds available when these costs arise, avoiding the need for special assessments.
A reserve fund study generally consists of two main elements: One, Physical Analysis, which involves assessing the condition of the common areas that the homeowners association is responsible for maintaining; and two, Financial Analysis, used to examine the financial health of the reserve fund to ensure it can cover future repair and replacement costs.
Applying Physical and Financial Analysis in Reserve Studies
Reserve funds should ideally be fully funded, with a minimum target of 70% funding. These funds are not intended to cover the daily operating expenses of the HOA.
Yes, HOAs employ fund accounting to manage and allocate funds for specific purposes, ensuring transparent and accurate financial records. This method is crucial as it helps prevent reserve funds from being treated as taxable income by the IRS if not kept in separate accounts.
Reserve contribution expenses are funds set aside over time for future significant expenses, such as replacements or renovations. This is different from maintenance expenses, which are part of the annual operating costs, like lawn care.
To ensure the security of HOA reserve funds, it’s advisable to invest in FDIC-insured accounts or similar safe investments. Options include bank savings accounts, treasury bills, and certificates of deposit (CDs), which offer safety and liquidity.
HOA Reserve Fund Accounting Explained: Community Expense Allocation
HOAs adopt reserve fund accounting systems that play a significant role in a community’s financial health and stability. These funds help you prepare for future expenses and protect property values. Knowing how to manage and account for these reserves will give your community the ability to handle major repairs and replacements without financial strain.
The system includes everything about HOA reserve fund accounting from financial responsibilities to budgeting strategies and long-term maintenance planning. We explain proper fund allocation methods, recommended operating fund balances, and ways to maintain adequate liquid funds. Our solutions help you avoid special assessments and protect your community’s assets by addressing common challenges in reserve fund management.
Understanding HOA Reserve Funds
Your HOA keeps two separate money accounts: operating funds and reserve funds. Operating funds cover daily expenses. Your reserve funds work like a savings account for the most important future expenses. HOAs usually put 20-40% of monthly dues into these reserves.
Reserve funds pay for big repairs, replacements, and property improvements. Here’s what they typically cover:
- Roof replacements on common buildings
- Major landscaping projects
- Pool repairs and pump replacements
- Road repaving
- Sidewalk construction
- Common area painting
- Playground equipment replacement
Your HOA should keep reserve levels between 70-100% to have enough money saved. A 100% funding level works best, but keeping at least 70% helps you avoid special assessments. Expert reserve studies happen every 3-5 years to review your community’s assets and set the right funding levels.
Your reserve money needs to be easily accessible to handle planned and surprise expenses. This financial safety net protects your community from sudden money problems when emergencies happen, like storm damage or system breakdowns. Communities without enough reserves might face special assessments or need loans to pay for repairs.
Components of HOA Reserve Fund Accounting
Regular reserve studies form the backbone of effective HOA reserve fund accounting. These studies need two key analyses: physical and financial. The physical analysis has a detailed inventory of community components, condition assessments, and estimated replacement costs. A financial analysis shows your reserve fund status and creates funding plans to cover expected expenses.
Your HOA should follow these steps to keep accurate reserve fund accounting:
- Complete reserve studies every 3-5 years
- Use stable funding strategies
- Keep reserve and operating budgets separate
- Record all financial transactions carefully
- Check and adjust funding levels regularly
Your reserve funding strategy should match National Reserve Study Standards. These standards recommend keeping enough cash while ensuring stable transfer rates. Most associations want a 70% funded reserve level. This level gives adequate protection against special assessments and remains financially practical.
Your HOA needs detailed records of all reserve-related transactions to follow proper accounting practices. Regular financial statements must show contributions, expenses, and current balances. Professional reserve studies cost between $500 and $10,000. This investment is vital to your community’s financial planning.
Managing and Maintaining Reserve Funds
Managing your reserve funds successfully requires balancing safety, liquidity, and investment returns. Professional studies suggest you should keep funding levels between 70% to 100% of predicted future expenses. This approach will give your community the ability to handle major repairs without special assessments.
- These practices are the foundations of good fund management: Use funds only for their intended purpose
- Put money in FDIC-insured accounts and low-risk options
- Review performance regularly
- Keep operations and reserves in separate accounts
- Ask financial advisors to help with complex investment choices
Your reserve study needs updates every 3-5 years. Annual reviews help assess if funds are adequate. A well-managed HOA budget typically sets aside 15-40% for reserves and keeps about 5% for unexpected needs. This well-laid-out strategy helps avoid underfunding, which affects about 70% of HOAs across the United States.
Safety and liquidity should come first with reserve fund investments. Secure options like FDIC-insured accounts, bank savings accounts, treasury bills, and certificates of deposit make sense. Your community stays financially stable and ready for future expenses through regular investment performance checks and strategy adjustments.
Common Challenges in Reserve Fund Accounting
Reserve fund management can substantially affect your community’s financial health. Research indicates many HOAs don’t have enough funds. This creates potential risks that could hurt property values and community upkeep.
Your association might face these vital challenges:
- Inadequate Funding Levels: Most communities don’t maintain the recommended 70-100% funding level
- Special Assessment Risks: Low reserves often result in unexpected special assessments
- Investment Management: Boards don’t deal very well with fund allocation and investment choices
- Homeowner Resistance: Getting enough assessment money meets resistance, especially during rate increases
Poor reserve management’s effects can hit hard. Property values in communities with low reserves drop by 12.6% on average. On top of that, your HOA might lose FHA loan eligibility if reserves drop below 10% of total budgeted income. This could hurt property sales and values.
A clear approach is vital to tackle these issues. Your accounting must separate regular assessments from reserve fund contributions. FHA compliance requires reserve studies every two years. These studies help keep funding projections accurate and prevent money shortfalls.
Conclusion
Professional HOA reserve funding serves as the lifeblood of successful community management. Professional reserve studies, adequate funding levels, and transparent financial practices protect property values and prevent unexpected special assessments. Communities that managed to keep their reserve funds at 70% or higher of the recommended levels show responsible financial stewardship and avoid the 12.6% property value decrease linked to underfunding.
Mutually beneficial alliances in reserve fund management create long-term benefits through stable monthly assessments and reliable maintenance schedules. Communities excel when they separate operating and reserve accounts, conduct regular studies, and follow clear accounting practices. These proactive steps protect the community’s property values and quality of life while building a strong foundation that meets future needs.
RECOMMENDATION. The most important thing a board can do is properly fund their association’s reserves and then spend the money to maintain the common areas. A guide on the best practices for “Reserve Studies & Reserve Management” was put together by the Foundation for Community Association Research and is available as a free download. Boards, treasurers and budget committees should read it. (Additional “Best Practices” guides on matters such as security, ethics, financial operations, and governance are also available from the Foundation.)
In California HOA Boards have a legal and fiduciary responsibility to the association members (property owners), similar to that of all corporate board members. By not including reserve funding in the association’s annual budget, Board Members are not demonstrating prudent judgment and sound business practices, and they could be (personally or as a group) liable for breach of fiduciary duty.
Sources:
https://www.reserveadvisors.com/resources/blog/what-is-a-reserve-study-and-why-is-it-important/
https://www.reservestudy.com/resources/article/hoa-reserve-funds-how-to-properly-fund-reserves
https://www.apsmanagement.com/blog/how-much-money-should-an-hoa-keep-in-its-reserve-fund/
https://www.ask.com/culture/hoa-reserve-fund-accounting-key-elements-best-practices