We know that financial operations like reserve funds present a unique challenge to your Homeowners Association (HOA). Proper budgeting and allocation of reserve funds can often leave you feeling confused about when you should (and shouldn’t) use them.
The purpose of an HOA reserve fund is simple: it provides a way to pay for specific types of expenses over the long-term.
However, how you manage and run your reserve fund is also critical to your community’s health and lifespan. Every HOA reserve fund has a direct impact on its community and the success of its association.
So, when it comes to HOA reserve funds, when should (or shouldn’t) you use them?
Before we tackle this question, let’s cover the basics.
HOA Reserve Funds vs. HOA Operating Funds
In addition to reserve funds, an HOA also manages operating funds. Both the reserve and operating funds require homeowners within the HOA to pay fees. These fees support the community by paying for various expenses.
This is why proper management of HOA reserve and operating funds is so crucial. A well-funded reserve can help you make sure that any long-term improvements are fully funded, without dipping into your day-to-day operating funds.
It’s for this reason that it’s essential to recognize the differences between HOA reserve funds and HOA operating funds as it’ll help you understand when you should (or shouldn’t) use HOA reserve funds.
HOA Operating Funds
Operating funds pay for daily or recurring HOA expenses. Recurring HOA expenses include things like:
- Insurance Premiums
- Security Services
- Janitorial Services
- Office Expenses
- Legal Expenses
- Property Management
- Regular Maintenance of Common Areas
The budget for HOA operating funds is usually determined by calculating operational expenses for at least 3 – 6 months. Homeowner fees help the HOA support this budget.
HOA Reserve Funds
Reserve funds pay for non-recurring expenses. They go toward big, future projects or improvements like pool repairs and replacing the clubhouse roof or community fence.
The HOA needs to know how much reserve funds to have available at any given time. However, budgeting for the unknown can be tricky. This is why it’s recommended that an HOA hires a professional to conduct reserve studies every 3 – 5 years.
A reserve study analyzes the HOA’s financial budget against the physical state of the community. The result is an estimated cost of what will require renovation, repairs, and replacement over a few years.
To help create a more accurate estimate, you should also inspect amenities every year. This will help the HOA to determine additional budget tweaks or changes.
When to use your HOA’s reserve funds
If you’re wondering whether or not you can (or should) use your HOA’s reserve funds for a particular expense, ask yourself these three simple questions:
Is this expense going toward a capital improvement?
If the answer to this question is ‘yes’, you cannot use your HOA’s reserve funds. Adding a new community feature or facility is considered a capital improvement.
HOA reserve funds only cover repairs, replacements, and unforeseen expenses. Something like a new building requires planning. Therefore, it requires a different fund to cover the cost.
Is this expense recurring?
If you need to pay for the same expense every month, it’s recurring. All recurring expenses must come out of your HOA’s operating fund.
Is the project long-term?
If the project will take longer than a few days, it’s likely considered long-term. Long-term projects that don’t fall under ‘capital improvement’ typically use HOA reserve funds.
Some examples of the types of long-term projects generally paid for with HOA reserve funds include:
- Major landscaping work
- Community pool pump replacement
- Fence replacement and repair
- Building a new community park
- Painting
- Sidewalk replacement or repair
Best practices for using your HOA Reserve Funds
When it comes to best practices for using your HOA reserve funds, consider the following:
HOA Reserve Fund rules and regulations
In general, when board members set reserve fund requirements, they need to think about:
- The types of unbudgeted expenses that come up
- How much it will take to pay for those unbudgeted expenses
- The savings required per year to cover the cost
However, all HOA reserve fund spending must also stick to community bylaws and regulations.
For example, according to California Civil Code §5550, an HOA is required to maintain reserve fund balances. The balance amount must be based on a reserve study done a minimum of once every three years.
The reserve study must also identify what the HOA must maintain, the annual contribution amount, and all significant community components’ lifespan.
Remember that different states across America have different HOA reserve fund rules and regulations.
The Checking vs. Savings Analogy
Here’s a fun analogy. Think of your operating fund like your checking account. After all, you use your checking account for every day, recurring expenses like groceries or utility bills.
However, your savings account is where you hold onto your reserve funds to pay for unexpected expenses, like that new pump for your pool.
When it comes to HOA reserve fund best practices, consider which account you would use to pay for the expense.
If your HOA wanted to update the clubhouse, this renovation project would likely come out of your savings account. Therefore, this renovation work would come out of the HOA reserve fund.
Let’s say you wanted landscapers to keep the community lawn freshly mowed every week. This would likely come out of your checking account. Therefore, landscaping would come out of the HOA operating fund.
The Main 3 HOA Reserve Fund Question
When all else fails, go back to the three questions you should ask when you’re unsure whether or not to use your HOA reserve funds.
Remember:
- Is this a long-term project? Use HOA reserve funds for long-term projects only.
- Is this a recurring expense? Your recurring expenses fall under HOA operating funds.
- Is this a capital expense? If it’s a capital expense, don’t use your HOA funds.
Managing your HOA Reserve Funds
Proper management of your HOA reserve funds can make or break your community. The last thing you want is to discover a major expense you can’t afford to fix.
To help you better manage your HOA reserve funds, here’s a list of tips to take into consideration:
- Adjust the budget when needed. Increasing fees incrementally over time is better than asking for a lump sum amount.
- Transparency is key. Keep homeowners up to date on your HOA reserve fund. If you need to increase fees, your homeowners will know why (and will likely understand).
- Stay on top of maintenance. It’s easier to fix smaller problems today than to deal with a big problem tomorrow.
- Conduct regular inspections and keep track of general wear and tear. This will help you to estimate when you might need to repair or replace equipment (or anything else).
- Hire a professional company to run an HOA reserve study. This will help you to determine the correct amount to budget.
Are you looking for more answers to your HOA Reserve Fund questions?
At California Builder Services, our team is here to help your HOA succeed! With over half a century of experience, our highly trained staff will conduct reserve studies on any size or type of development. We know how important it is to efficiently – and accurately – prepare a reserve study for approval by the Department of Real Estate’s investigators.
Get in touch today and we’ll work together to help your HOA succeed.
