Homeowners Association (HOA) fees are funds that are collected from owners to pay for master insurance, exterior maintenance, landscaping, and other shared community expenses. These fees are usually based upon the budget adopted by the association’s board and will change overtime to reflect changes in the association’s expenses.
Ideally, association HOA assessments should anticipate significant capital expenses such as a new roof, paving, etc. Low monthly HOA fees can result in inadequate reserve funds. This creates the potential situation where a special assessment is necessary to cover large expenses.
Equipment and major repairs must be replaced from time to time, regardless of whether the community plans for the expense. For example, asphalt shingle roofs typically last about 20 years. By spreading the projected expense of a new roof over 20 years and including this in the monthly HOA fees, your community will have enough money to pay for the roof. That may not seem important to you today if your roof is new, but it becomes significantly more important when the roof is in need of repair, when you want to sell your home or when your ceiling is leaking.
There are other important reasons to put association money into reserves every month. Reserve funds meet legal, fiduciary, and professional requirements. A replacement fund may be required by:
- Mortgage market(s)
- State statutes and regulations
- Community’s governing documents
Reserve funds provide for major repairs and replacements that the community knows will be necessary at some point in time. It’s impossible to project the exact time that every repair will be needed. Planning takes experience, and a property management company can guide your board in developing realistic projections and expectations.
Lenders and real estate agents are becoming more aware of the consequences for new buyers if the reserves are inadequate. It’s important to maintain funds so that your association is kept in prime condition for your current residents. Sufficient reserve funds also enhance resale values, and some states require associations to disclose the amounts in their reserve funds to prospective purchasers. Thus, the amount of your reserve fund will have an impact on the future market value of your home.
Reserve funds minimize the need for special assessments and/or borrowing money that comes with added interest expense. For most association members, these are the most important reason to make sure you have an adequate reserve fund.
Whether you are starting with an adequate reserve fund or just beginning to build it, keep working toward the optimal amount that will cover your association’s needs. It’s difficult to raise monthly fees in the short term, but having adequate reserve funds will preserve and protect every homeowner’s investment by ensuring the association is prepared for the future.
Wise Property Solutions serves condominium and homeowners associations by addressing their financial, association and facilities management needs. The only certified and licensed community association management firm serving the Mountain South (Virginia, North & South Carolina, Tennessee) with offices in the Tri-Cities and Knoxville.