Have you wondered how your HOA finances the construction of the playground, replacement of the pool pump, painting of community structure, and other projects? Unknown to many, your HOA has two funds—the operating fund and the reserve fund. The former takes care of the daily expenses, while the latter serves as the community association’s savings account.
The reserve fund is your community’s emergency fund and helps the association cover the expenses of extensive projects that the operating fund cannot address. The reserve fund takes care of the cost of clubhouse repairs, HVAC unit replacement, and other significant expenses and is also used to pay for the cost of litigation and reimburse dues increases.
Your HOAs should regularly save for the future to keep your community association financially healthy. However, this is easier said than done, which is why many entities offer HOA budgeting services. You can learn more about HOA finances by reading this article.
How HOA Financing Works
The association’s funds should be in two banks, a smaller one and a bigger one. The funds of the smaller bank can be readily withdrawn, but those in the big bank cannot be accessed easily.
Experts offering HOA budgeting services say that this should be the case because this system forces the association to save funds. Withdrawals are only possible if the association’s finance committee has agreed.
The HOA uses the interest on these funds to pay the association’s monthly expenses. The operating fund shoulders the monthly costs. HOA budgets set aside monies specifically for these expenses.
Know the Reserve Funds of an HOA
According to firms that offer HOA budgeting services, HOAs should not hold less than two months of operating expenses. If the HOA is in an area that requires frequent repairs or renovations, the association’s savings should be even more significant. Also, associations that have expensive infrastructure should set aside more than necessary.
The reserve funds should be contingent on the money that can be accessed. The association should not use these funds for purposes other than the intended ones.
Experts say that the HOA should dip into the reserve fund only if there are no other options. They recommend that HOAs allocate enough funds to their operating expenses to avoid using the reserve.
Having an Underfunded HOA Reserve
There is no need to worry about underfunded reserves in an ideal setting. If the association’s reserve is underfunded, it is essential to go back to the drawing board.
According to the professionals offering HOA budgeting services, the association can look for other ways to raise funds. For example, it can hold fundraisers or increase the dues collected from its members.
If neither of these things is possible, the association may have to sell assets, as this is one of the ways to fill in a deficit. However, selling assets is not ideal as this may negatively affect the association’s property values. The association can also cut costs. It may mean that it has to reduce the number of employees at that.
HOA budgeting services are crucial to associations because they help them manage their finances properly. They also ensure that the associations do not overspend or overborrow, protecting them from problems in the long run.
If you want to ensure that your association has enough reserve funds, you should talk to California Builder Services. We offer HOA budgeting services and other consulting assistance. Contact us now for more information!