There aren’t many constants in HOA living. From new neighbors to new board members to new community needs, the landscape around you is constantly in flux (sometimes literally). But one thing every community can count on is reliance on the reserve fund. Eventually, a day will come when that fund will be necessary for large-scale maintenance, repairs, or enhancements to your community. Ensuring that it is healthy and consistently funded can be the difference between financial stability and uncertainty.
How to Build a Successful HOA Reserve Fund Strategy
Communicate and Educate
First and foremost, you need the support of your community. And that is not an easy task. Reserve funding is most often the first thing to stop when boards get push back on association fee increases. There is a long and tired history of community associations “kicking the can down the road” and letting the dried up account be someone else’s future problem. But we’ve seen first-hand how that kind of neglect can add up, and what can happen when funding isn’t available.
Open a dialogue with your membership. Be transparent with your homeowners about the enormous responsibility everyone has in taking care of the community. Knowledge and honesty are powerful trust-building tools. When people understand the necessity of a cost, they are less likely to defer payment or maintenance.
By understanding the importance of the money they’re paying to the community, members will feel included in the conversation and responsive to this important financial tool.
Adopt a Comprehensive Financial Plan
A financial plan is a great tool to bring to any conversation you have about finances, especially when educating homeowners about their rising association fees. A truly comprehensive financial plan should include both short- and long-term goals and expectations. In an HOA, this is typically split between two main funds: the Operating Fund and the Replacement Fund.
The Operating Fund covers day-to-day expenses. Landscaping, utilities, insurance, and administrative costs will all fall under the Operating Fund umbrella. This fund is budgeted annually to ensure that the HOA can meet its operating expenses. The Replacement Fund is designated for longer-term goals. Major maintenance and capital improvements are the primary focus of this fund. It’s crucial for planning and budgeting for future large expenses, such as replacing roofs or elevators, or repaving roads within the community.
By allocating funds to both the Operating and Replacement Funds, an HOA can ensure that it effectively manages its current operating expenses while also preparing for significant future maintenance needs.
Set a Realistic Reserve Fund Contribution
Convincing your community to invest in their future only goes over well if that investment makes sense. That means it should serve both the needs of the HOA and consider the needs of homeowner bank accounts.
Too low, and your reserve fund can become anemic, making your well-laid plans uncertain. Necessary maintenance and / or component replacements may be delayed, resulting in damage and higher costs or, perhaps worse still, the always unwelcome special assessment. Too high, and you risk the community voting against budgeting for and funding the necessary expenses, leading to the dreaded deferred maintenance that the reserve fund aims to fix.
Finding a middle ground means thoughtfully considering all of your community’s expected wear-and-tear and how best to implement improvements to the areas in need. It’s important to remember that there is no such thing as the perfect price point here. Someone will be upset. Some amenity will go without maintenance for a little longer than it should. This is normal and expected. The goal is a reasonable contribution amount that can move the needle without overwhelming your community.
Monitor and Update The Reserve Fund
This ties back into the concept of communication and education of your homeowners. More than that, financial transparency is critical for plenty of others also, such as future home buyers, real estate professionals, and lenders. The best way to balance and check your reserve fund is to defer to your Reserve Study.
Not every community will have this document, but it is a critical asset for any community association. In fact, Washington state law typically mandates that HOAs must have a Reserve Study. As a comprehensive review of your community’s past, present, and future physical and financial needs, it should be fundamental in your reserve funding strategy. That strategy will allow outside professionals to get a glimpse into how the HOA anticipates spending for future major expenses.
One Last Strategic Tip: Seek Professional Advice
Finances are complicated, and planning for a future you may not even expect to be a part of can be a daunting task. Finding a service provider and partner who can support not only your fiscal obligations, but your decision-making needs as a board, is a great step toward keeping the community financially healthy long-term.
Morris Management has been serving communities just like yours for over three decades. Whether you need a team of HOA accounting pros to help keep the books and community in order, or a full-scale financial overhaul complete with multi-year planning, we can help.
Connect with our team today. Let’s create a more secure financial future for your community, together.
