Homeowner associations are responsible to plan for future repair and replacement events to common element. The "reserve study," as it is called, is a comprehensive analysis that provides a schedule and funding recommendation to keep building and grounds components like painting, fencing and paving in good repair. Unfortunately, even HOAs that have a reserve study too often ignore them or only partially implement the recommendations. As HOAs reach 20 years old or so, many of the most expensive repairs come due, like roofing, fencing, decks and equipment replacement.
Without proper reserve planning and accumulation of reserve funds, HOA Boards that are not prepared face unpopular and unfair special assessments. As the unavoidable looms, most boards to dodge and weave, defer and delay. What's a year or two more going to matter? And, by next year, the directors might be able to sell their units and avoid the unpleasantry altogether. Meanwhile, Rome burns.
One oft overlooked advantage of effective reserve planning is strategic investing of the funds. The study reveals when funds will be needed and thus allows available funds to be invested for longer terms and higher yields. An increase of only 1-2 percent in investment yield can often lead to hundreds of thousands of dollars in additional interest earnings over the projection period. Every dollar of interest earned is one dollar less of owner contribution. It's like having someone else pay the freight.
One option that HOAs consider to finance urgent repairs is bank loans. When HOAs borrow money, it's considered a commercial loan and both the rate and loan fees are considerably higher than home loans. These loans are typically short term (five to ten years) and HOA loans require monthly payments just like any other. The lenders require much hoop jumping to get them. There are only a few lenders that will do them at all. There are situations when borrowing money is called for (like unanticipated and hugely expensive urgent repairs) but there's simply no free lunch and this one comes at a premium price. If certain owners lack the cash to fund an urgent special assessment, it's much cheaper to get a home equity loan or even draw on a credit card. Home equity loan interest is deductible for this purpose.
For a variety of reasons including disability, divorce, retirement and long term unemployment, some HOA members may not be able to fulfill their financial obligations to the HOA. But consider this: Shelter is only trumped by food as a life priority. If a member is unable to afford HOA expenses, it may be time for a lifestyle adjustment. The HOA simply cannot fulfill its financial obligations when it plans around or concedes to the weakest link. While this sounds cruel, remember that there is no government bail-out for HOAs. If some don't pay, the rest must. If the Board can convince all the members to subsidize someone down on their luck, well and good. Otherwise, the Board should press for collection just like the IRS, and the sooner the better. Most members can come up with their share of cash when pressed. For the rest, it may be time for a heart to heart about downsizing.
A Professional Reserve Analyst can recommend material and design upgrades to reduce repair and replacement costs plus interval maintenance that will significantly extend the useful lives of some components. With longer lives, comes reduced owner contributions.
All things wear out sooner or later. A reserve study analyzes those assets that the HOA is responsible for, projects future costs, current funding needs and a schedule for keeping the assets in good repair. The approach is fair to all owners, now and in the future, and ensures repairs are done when needed. Result: happy members with sustainable home values.
Complacency has obvious pitfalls. Sooner or later, the inevitable becomes unavoidable. As the saying goes, "If you find yourself in a hole, stop digging."
