Red Flags that Signal Potential Problems with Your Reserve Fund

As a homeowner, board member, developer, or community manager, you bear a significant responsibility of ensuring that your community is always in top-notch condition, well-maintained, and prepared for any unexpected situations. One of your primary duties is managing your community’s reserve fund, which serves as a financial buffer to cover any unforeseen expenses or significant repairs. However, to ensure that your reserve fund remains intact and healthy, it’s crucial to be wary of red flags that could indicate potential issues with the state of your reserve fund. Below are three warning signs that suggest your reserve fund may not be in optimal shape:

Special Assessments Required to Fund Major Repairs

One of the biggest red flags indicating your reserve fund is in poor shape is when your community constantly imposes special assessments to fund major repairs. A special assessment is an additional fee that homeowners are required to pay with regular monthly dues. This fee is usually imposed when there isn’t enough money in the reserve fund to cover the cost of significant repairs or replacements for common areas and amenities within the development. If your community frequently resorts to special assessments, it could mean that your reserve fund is not adequately funded or that your community has not planned for unexpected expenses. Imposing special assessments often can also negatively affect community members and lower morale.

Deferred Maintenance

Deferred maintenance refers to the postponement of necessary repairs or replacements. This can happen when communities try to save money by delaying maintenance projects that should be addressed promptly. However, when homeowners’ associations delay major repairs, it often leads to even more significant problems that can end up costing them more in the long run. For instance, if an association decides to postpone painting its wood siding and trim, the wood is left vulnerable to the elements, leading to wood rot. Replacing and painting wood siding and trim can be many times more expensive than merely painting it. Additionally, the added expense could force the association to obtain a loan, incurring even more interest charges. Neglecting maintenance not only results in higher repair costs for an HOA but also damages the property’s aesthetic appeal and reduces property values.

Percent Funded continues to drop

The percent funded is the ratio of your community’s reserve fund balance to its total replacement cost. It is a measure of the adequacy of your reserve fund, with higher percentages indicating that your community is better prepared for unexpected expenses. If your community’s percent funded continues to drop, it could mean that your reserve fund is not growing at a rate that keeps up with inflation, or that your community is not contributing enough to the fund. In general, the following guidelines describe an association’s funding status based on the percentage funded: 0-30% funded = Poorly funded, 30-70% funded = Fairly funded, and >70% funded = Well funded. Lenders consider the percentage funded as the first thing in a reserve study because they understand that the lower the percentage funded, the higher the risk of deferred maintenance, special assessments, and declining property values. Typically, lenders prefer associations with a funding level above 60%.

Managing a reserve fund can be challenging, but it is critical for maintaining the long-term health of your community. By monitoring these red flags and acting as early as possible, you can help ensure that your community’s reserve fund is adequately funded and prepared for any unexpected expenses. Don’t wait until it’s too late – act now to safeguard the future of your community. We service community associations all throughout California. From HOA budgeting to Reserve studies, we are dedicated to offering our expertise and support whenever and wherever needed.

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