When the owners in your four-unit association all know each other, you may decide that reserves aren’t needed. That’s not the right direction for any association, regardless of the size. Every association needs to fund reserves to repair/replace common elements in addition to collecting assessments on a recurring basis instead of an as needed basis. Here’s why.
HOA Budget to Maintain Common Elements
Governing documents give the condo or homeowner association the right to collect assessments from each homeowner to maintain common elements. The amount that needs to be collected depends on the common areas that your association maintains, i.e., pool, clubhouse, sidewalks, roofing, external painting, etc. In addition to annual maintenance and operation costs, your budget should include money designated for a reserve fund for the larger replacement/repair expenses.
No Reserve Fund Means Special Assessments
You’re asking for trouble when you don’t fund your reserves. Just like single-family homes, associations have big-ticket items that must be replaced or repaired on a regular basis. If you don’t have reserves when the pool cracks or the roof starts leaking, you have two choices: 1) Significantly increase monthly assessments to pay the bill. 2) Levy a special one-time assessment to cover the cost. Neither of these options are popular, and it can be almost impossible to get the money you need on short notice. This puts your neighborhood at risk for deterioration.
Funded Reserves Closes the Sale
People choose to buy homes in associations because of the amenities they can’t afford on their own and managed maintenance. They count on the HOA Board to maintain property values and amenities. Having well-maintained property and fully funded reserves can seal the deal. But, potential buyers recognize that no reserve fund means less maintenance and more special assessments, causing them to buy in a better maintained association.
Some State Laws Require Reserve Funds
Condo and homeowner associations are subject to state laws, and these legal mandates vary widely from state to state. Many states require associations to have both an operating fund for regular expenses and a reserve for future capital expenses. Community Associations Institute updated its Summary of State Reserve Fund Laws in September 2013, but it’s best to check with a professional if you’re unsure of the requirements in your state. If a reserve fund isn’t mandated in your state, you should still do it because funding reserves is one of the key best practices in managing your association. Adequate reserves go a long way in preserving your property values.
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