Part of your responsibilities as an HOA accountant or HOA Board member is to keep sufficient funds in your HOA reserves. Residents are not fond of special assessments or fees due to poor accounting by the Board members and others who handle their monthly association payments.
But What Exactly Is an HOA Reserve Fund?
While the annual budget addresses most of the costs your association will encounter throughout the year, the reserve fund is for repairs and replacements of major community components.
It’s one of the two main accounts an HOA holds – the other is your operating fund for day to day expenses and new projects. An HOA reserve fund is similar to your personal savings account where you save money for the long term. It should be kept in a different bank account than the operating funds to avoid having it considered as taxable income by the IRS.
Those HOAs with underfunded reserves are sure to encounter cash flow problems. Sadly, many are ill-prepared for unanticipated future repairs. HOA management software can help you to stay on top of your accounting and save money for anticipated expenses. But how much should you have saved in HOA reserves? This question needs to be answered by every HOA so they can avoid any potential additional expenditures.
How Much Should Be Saved in Your HOA Reserves?
An HOA’s governing documents will likely outline requirements for your reserves.
However, if the state or the governing docs do not prescribe a set amount or percentage, the Board members must consider their fiduciary duties.
The best-case scenario is to have a fully funded HOA reserve fund that is sufficient to cover all costs. The next best option is to have at least 70% of the funds for future repairs available. The key is to stay on top of your reserves and continuously add funding in preparation for the future.
A management company can create or update a reserve study, but hiring a professional reserve company every few years provides more accurate estimates. The reserve study offers an assessment regarding major assets, amenities, or facilities for future repairs and replacements, and at what cost.
The reserve study schedule distributes those depreciation costs based on the timing of needed repair or replacements so that the HOA collects enough funds. It helps HOAs to establish how much money to save each month.
Four Problems of Underfunded Reserves for HOAs
If your current reserve fund is undercapitalized, it’s critical to turn things around fast.
An expense is bound to come up, and it’s merely a matter of when. Underfunding your reserves can lead to significant problems, such as:
1. Unhappy Homeowners – Homeowners will not be happy with any special assessments you apply. Residents expect the board or accountant to manage funds to help alleviate any additional surprise expenses appropriately.
2. Lack of Capital – Borrowing money isn’t always an option. The banks may not be so open to lending when funds are needed.
3. Interference with Future Resident Loans – Depending on owner occupancy, if the HOA reserves dip below 10% to 20% of total budgeted incomes, it negatively affects prospective homeowners seeking loans within the confines of the association.
4. More Expensive Repairs – Redistributing funds and deferring maintenance can make small issues more costly. Maintaining and monitoring assets with preventative care is critical to prolonging their lifespan, lowering long term costs, and anticipating future repairs.
The status of the reserve fund should be made available to homeowners. This transparency can help to get them on board about options to improve the balance. Consider adjustments if the annual budget reveals less than 70% is available in the reserve fund. Allocate more of your owners’ association fees to the reserves if possible; aim for somewhere between 15% and 40%.
Accounting and Reserve Funds: Why You Need HOA Management Software
Be careful when it comes to accounting and spending reserve funds.
You’ll want to create a journal entry in your HOA management software to keep your Balance Sheet in order. An accounting package intended for managing community associations can help to avoid issues that universal accounting packages can produce. Don’t wait to get your reserves on track until it’s too late.
TOPS [ONE] makes community management and accounting easier for associations and property managers. Our robust accounting system, designed specifically for community associations, is embedded with automation and customizable features. We even offer stress-free, full-service bookkeeping from our experts in the CAM industry. Reach out to get started with a free consultation.
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