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Underfunded Reserves | BarreraCo

Nov 19
0

Should HOAs Invest Reserve Funds?

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Investing Reserve FundsCommunity Associations, at various times, collect money to fund reserves and/or for working capital. Is it wise for Associations to invest these dollars while they are accumulating for future repairs and replacement of the Communities’ assets?

The answer is yes – but through well-informed decision making.

The first important thing to remember is that Reserve Studies assume some level of interest is being earned on reserve account balances.

However, these assumptions are relatively conservative with respect to the interest earned. Typically it will range from one to three percent.

But it’s important to note – the interest-earned component is an integral part of the funding plans for reserves. Therefore the Association should always have in place a policy or strategy for keeping the reserve balance in some low-risk, interest bearing account.

Put simply – Your HOA should seriously consider developing and approving an investment policy to help maximize the interest income while minimizing risk. For example, your policy should list types of acceptable investments as approved by the HOA Board of Directors. They might include Certificates of Deposit (CDs), Money Market Accounts, FDIC insured banks or other investment companies that are pre-approved by the Board.

The idea here is to make sure your money is always working for you but don’t lose sight of the inherent risk involved with investments. Always consult the appropriate professionals when setting up your policy.

Read More:  The role of an HOA board

Interested in getting a Reserve Study for your community? Click here to get a proposal!

Nov 05
0

Reserve Studies and Funding : Survey of 400 community managers

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A couple of months ago, the Foundation for Community Association Research conducted a survey of almost 400 community managers.

When asked whether or not the associations had a formal reserve fund, 93% of respondents stated that their association did, but the most interesting find of the survey has to do with the level of funding within these funds.

When asked the question “How does the association determine how much to keep in the reserve fund?” almost 20% responded with “What the association can afford to set aside,” but that they “do NOT believe is adequate”.

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While almost 75% of survey respondents indicated basing their reserve fund levels on the recommendations of professional Reserve Specialists, over 25% indicated that the amount in the Reserve Fund is dictated by whatever the association can afford to set aside.

For Homeowners Associations and Community Managers, this scenario can quickly become dangerous if a costly or emergency repair arises. More importantly, is that ultimately the reality and cost of underfunded reserves is passed on to the homeowners themselves. If an HOA can not properly maintain roads, pools, or roofs the value of residents’ properties may be harmed. When HOA’s resort to special assessments, the cost to owners can run in the tens of thousands of dollars – no small expense for the average homeowner.

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For owners and buyers, here are some quick tips to help you evaluate the financial health of an HOA:

  • If you are a buyer, demand that the seller provide you with copies of the most current financials for your review.
  • If you are an owner, make sure that you are given annual financial reports, especially the delinquency report and those pertaining to the adequacy of the reserve account.
  • If you are a buyer, do a physical review of the property and observe how the common areas are maintained. For example, assess the condition of exterior paint, amenities, roads, roofs, drives, fencing, etc.
  • If you are an owner, be involved with the board and its decisions, especially when you see deferred maintenance of common areas or are subject to special assessments.(Joseph Aiu, California Department of Real Estate, 2012)

For more information on the effects of Underfunded HOA’s,  read this Consumer Warning from the CA D.R.E.

All images taken from CIARF.org’s Snap Survey : Reserve Studies and Funding.

Click here to download the report.

To find out more about our procedures for conducting reserve studies, or to be in touch with a reserve study specialist click here or give us a call at (800) 543-8670.

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