For each Home Owner's Association (HOA) there are regular expenses that come out of the annual operating fund, and there are the occasional necessary large expenses that must come from the HOA's reserve fund. It's not always easy to predict when these special expenses will occur or how much money they'll be and it's especially difficult to have already collected the right amount to pay for them. This is why HOAs often hire a Reserve Specialist to examine their potential future needs and make preparations to pay for these occasional community needs.
Operating Funds vs. Reserve Funds
An HOA pays its expenses from two pools of funds: the operating fund which handles regular, predictable, and annual expenses and the reserve fund which is set aside to handle emergencies and large investments into the community area. Here's a quick summary of the difference in what these two funds should be spent on:
Operating Fund Expenses
- Regular bills like landscaping, pool maintenance, and utilities
- Annual expenses like taxes, legal fees, and insurance
- Supplies for the HOA headquarters and out-buildings
Reserve Fund Expenses
- Significant landscaping or planting projects
- New or renovated playgrounds
- Roof and infrastructure repair on community buildings
- Construction or renovation in public areas
- Pump replacement or tile repair for the community pool
- Repainting community fences, features, and buildings
What is a HOA Reserve Study?
People join HOA communities because they are willing to trade annual fees for an enjoyable and well-kept neighborhood. While they don't want to pay unnecessarily high fees, they also don't want their beloved neighborhood falling into disrepair. There is a delicate balance between preparing for those occasional large expenses and not overcharging homeowners. A reserve study covers all these bases by carefully examining the potential future reserve expenses and making a plan to have just enough money in the reserve fund to cover them, with a little left over for emergencies. When calculating for future reserve expenditures, several factors must be taken into account:
- Necessary repairs to shared community buildings, features, and assets. This may require a thorough inspection of shared grounds, the pool, gym, flower beds, and the utilities in any community buildings.
- Construction and Renovation projects planned by the HOA. While these are not as necessary as the repairs, they improve the value of the neighborhood and are probably features that a large percentage of the homeowners in the association wanted.
- Desired major landscaping changes. These can include everything from planting new trees to ripping out old flower beds and completely redesigning the landscaping assets in the neighborhood.
The Reserve Specialist
The reserve study doesn't happen on its own; an expert has to consult with the HOA, gain a deep understanding of their future expenses, and then create a comprehensive plan on how to meet costs. Reserve specialists are a unique combination of an accountant and financial manager. When they have completed the reserve study and knew how much an HOA needs to spend vs. how much they have saved, the specialist then prepares a report for the association to review and make decisions based off of. The reserve report not only summarizes the financial balance between costs and current funds, but also includes the specialists' personalized advice on how the HOA might raise any missing funds or, in some cases, advise that homeowner fees can be at least temporarily lowered because there is more than enough in the reserve fund to pay for their prediction of next year's expenses.
When To Call a Reserve Specialist?
Due to the annual nature of finances, an HOA may want their reserve specialist to complete a reserve study every few years. Some states mandate the frequency of studies; so be sure to consult your respective state guidelines. Who to hire and when to hire them varies from association to association, with some choosing to keep a favorite reserve specialist on call, while others may hunt for the best deal on reserve specialist services each year. Whichever you choose, remember to get your ducks in a row before asking for a reserve study. Prepare a list of renovations and repairs you want to make and enumerate the urgency each carries. This will help your reserve specialist make a complete assessment and offer an optimized reserve plan for the upcoming year.
The reserve fund embodies the benefits homeowners attain by forming and joining a strong HOA. It is there to keep community grounds safe and beautiful and invest pooled resources on improving the shared community area. The consideration, care, and thoroughness of your reserve specialist make all of this possible by meticulously planning for each unique expense and offering advice to the HOA on how to prepare the reserve fund.
For more useful information on running your HOA, contact us to speak with one of our community experts.