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Considering Your HOA's Reserve Funds

Written by on Tuesday, 20 September 2016 3:17 pm
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In recent years, the importance of accumulating reserves has become a long overdue reality for many homeowner associations (HOAs). Proper long range planning drives an HOA's ability to adequately care for the common assets by having both adequate reserve funds and a realistic renovation schedule to follow. A well executed reserve study calls for a funding plan that systematically grows reserves to address future renovation without the need for special assessments which are unfair to many and difficult to collect.

As a rule of thumb, the average garden variety condominium has 15-20 common components to maintain. Based on that, the HOA should have around $8000 per unit in reserves. (Do the math for your HOA.) However, there are many HOAs that should have much more than that because of deferred maintenance or more common elements. For example, high rise condominiums can easily have 50 or more common components.

Even the most modest homeowner associations should often have hundreds of thousands of dollars socked away in reserves. Larger, more complex properties should accumulate reserves in the millions. To truly know what level of reserves applies, a reserve study must be performed by an experienced and qualified reserve analyst.

The board should only invest in guaranteed and insured investments unless the entire membership (100%) votes to be more aggressive. In either case, there should be a clear and written investment policy for the board to follow.

As reserve funds grow, it's extremely important to have an investment plan. Wisely investing reserves can reduce owner contributions by many thousands of dollars over time. While your friendly banker always has some investment options available, the board should explore other options. For example, opening an account in an investment advisory company like Edward Jones will give the HOA access to the highest yielding Certificates of Deposit (CDs) available. Buying CDs with different maturities like 3, 5 and 10 years (called laddering) will create an average return that is significantly higher than any savings or money market account. By synchronizing CD maturity dates with reserve renovation events, the HOA will have liquid cash when needed.

A word about depositor insurance. FDIC Insurance is currently limited to $250,000. But some banks catering to homeowner association business have additional private depositor insurance that protects a much larger amount of HOA funds. While this addresses the depositor insurance question, the board still needs to consider whether the bank offers the best rates.

When considering your HOA's reserve funds, treat it like your own money. Invest in things that don't risk principal yet return interest at levels that keep pace with inflation.

For more innovative HOA management strategies, subscribe to www.Regenesis.net.

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  About the author, Richard Thompson

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.