Residents choose to be part of an HOA community because they appreciate the value of the additional amenities and the focus on maintaining a consistently high standard across all of the aesthetics.
The challenge for those managing communities is to ensure they maintain standards and amenities in a way that meets expectations. However, knowing how to budget for potential repairs and maintenance can be difficult. Although there are some measurements of how long facades and equipment may last, there are also many unexpected conditions like weather, natural disasters, and other situations that may shorten the lifespan of those assets.
When those unexpected things occur, the next issue becomes whether the community has the reserve funds – a community savings account — in place. If additional funding is not available in some type of reserve fund bank account, then the community may have to announce a special assessment that collects more money from residents. And, no one wants to do that because it is clear how residents will feel about parting with more of their hard-earned money.
Two Key Tools for Planning for the Unexpected
To financially prepare your community for the unexpected, you will need to implement two tools:
- A reserve fund is like an individual or family’s emergency fund account. It serves as a financial buffer should any unexpected – and costly – storm hit. Money is put aside in this reserve fund to grow and be available to cover any future expenditures that can be used toward larger-scale maintenance and repairs.
- A reserve studyis developed from research that includes a physical analysis of a community’s assets to determine their condition and potential life span. The study also provides information about a detailed financial analysis that looks at the current status of the reserve fund and determines what the regular funding contribution should be that will offset findings from the physical analysis of the community’s assets.
Both must be in place in order to realize the benefits that financial planning and proactive maintenance and repair strategies can offer a managed community.
How Reserve Funding Benefits the Community Budget and More
Let’s look at some of the direct benefits that your community can achieve for its budget, fiscal health, and overall value.
First, everyone in the community will feel good when they know the money will be available should they ever need it for an unexpected expensive repair or maintenance project. Since these situations are stressful enough on their own, the last thing any community needs is to then worry about where they can get the money to address it or how the community will take it when they have to ask them for more funding.
Second, being able to immediately address maintenance and repairs means the community will retain its attractive aesthetics. This will help to preserve the market value of all the community’s properties.
Third, having a fund enables equitable cost participation. That means each resident can enjoy the community assets without having to spend any more to do so. Over time, each generation of residents who have contributed to the reserve fund through their regular monthly assessment can do the same.
Using a Reserve Study Specialist
To ensure a comprehensive examination of your community, it is good to use a third-party who has experience and expertise in the area of assessing physical community assets and researching financial positions.
A reserve specialist also looks at the community from the outside in. In being unbiased, they are more likely to see and assess issues than anyone who represents the community. Plus, they better understand your state’s requirements for reserve funds and reserve studies.
A reserve study specialist will also tell you that these studies must be regularly updated to reflect changes and new requirements. Regular updates will also provide a way to discover if any assets have diminished more than expected rather than to cause a surprise later on. Some communities have even resorted to what are known as Living Reserve studies to keep data relevant and aligned with potential issues and funding strategies.
Best Practices
Here are some things to keep in mind that can maximize the benefits to your budget, bottom line, and the community’s reputation:
- Thoughtfully categorize your community’s common area assets by those items that require regular maintenance, those that need replacement over time, and those that require both. There may also need to be a category for infrastructure components like sewers to consider.
- Budget for maintenance costs every year and complete planned maintenance related to those costs rather than opting to defer maintenance. Remember that it is a good strategy to include less expensive items in the operating budget while costlier maintenance and repair items should be listed as reserve components.
- Ensure that a reserve contribution is made every year to help grow that reserve fund over time.
Here to Help
As you can see, both reserve funds and a regularly updated reserve study are must-have tools to ensure your community’s long-term financial plan meets its needs and addresses all maintenance and repair costs while also providing a cushion for the unexpected.
The Innovia co-op team has worked with many communities and understands the challenges you face with planning and reserve studies. When you join our co-op, you not only get the expertise of our team, but you also can tap into the wealth of knowledge and experience that our other co-op members are happy to share. Contact us to learn more about how we can help you maximize both these tools.
