Magic Formula for Reserve Accounts

Is there a magic formula to determine how much we need to be putting away in reserve accounts for our rainy days?

Explanation: We are a HOA which has been in existence for 12-13 years and currently with our third management agent. When I took over as President 1 1/2 years ago, we were in a mess. We are finally getting our feet on the ground, but we still have a long way to go. Our gated subdivision consists of only 104 houses and our assessment from the start was $75 per quarter. Two years ago, I convinced the board we need to raise the assessment charges as we were getting ready to recoat our roadways and it was going to take a big hunk of our reserve money. Based upon the declarations we could only raise it by 10%, so we jumped it up a bit to $5.00 per quarter to $80.00. Boy, did we take a lot of flack! The first management agent told the board at that time they only needed to be concerned with putting away money to cover the roads, and nothing else. Wrong!!! None of the next two management agents hired by the HOA Board never made recommendations to the board on building up the reserves for the future. We are lucky in that our subdivision doesn't have a playground or pool, and the common areas only consist of the entrance area, gates, roads, sidewalks, curbs, wooden/stone fences around 3/4 of the subdivision, and part of each driveway into the lots. In the past four years the HOA replaced the wooden fencing (lousy job by a contactor), patched a few spots in the stone fences, and we recoated all the roads. Last year was the first year, in record, that the board was able to submit a balanced budget. Yes, it is balanced, but no money going to reserve. If something comes up we have to tap into our savings to cover it. As many HOA's are aware after 13 years a lot of things start to fall apart.

So my question is: how do we figure out how much money we need to start putting away in reserve for the future? Yes, I know we are going to have to increase the assessments again for 2012 and probably for 4-5 years thereafter just to get some cushion. Anybody got a good idea for us?

There is no magic formula.

Pay for a reserve study, or do one yourself.

What you need depends on how much it costs to maintain and replace what "you have". This amount will be different for every condominium.

Here is a sample:
http://goo.gl/ovJvo

The only correct way to find out what you need is to calculate it. And the only way you can calculate it is by doing a reserve study.

By just tossing out a number like $100,000 or saying 3 times annual assessment is just guessing. Many condo's run this way, but its not the correct way to do it.

So far, we've had two managers who swept reserve issues under the rug. Why do they do that? Oh, I know, because it's easier to just tell people what they want to hear and collect a paycheck.

Like others say, you should get a reserve study. It is better to buy one so there will be fewer arguments about whether it is legitimate or not.

It is really hard to get managers and homeowners to understand that reserves aren't just in case fences need to replaced but that it is a sure-fire certainty that, someday, the fences WILL need to be replaced. They tend to think of it as "a good idea but not important in this economy" or a slush fund or a rainy day fund.

You always get lots of flack the first time that fees go up.

Lousy job on fences is almost a cliche. Without supervision, contractors will often do a bad job.

Melissa,

I believe that Elby is talking about a Reserve fund to replace/repair capital components. This would be different then the "reserves" used for contingencies, like making up the difference when a line item exceeds the planned budget.

Both are called reserves but they are actually two very different things. I've heard that 10% or 1 to 2 months of annual assessments is considered good for a contingency reserve. However, the reserve fund needed for capital components can easily approach several hundred thousand dollars if roads or parking lots are part of the common area that must be maintained.

Failure to have a properly funded Reserve for capital components could easily lead to the need for special assessments. Worst case, it could prevent lenders from loaning money to buyers (as the lenders are now taking a look at the financial stability of the Association when making decisions).

Tim

Good for you. Here is the other side of the coin. What do you do AFTER you finish saving some money into the Reserve fund? How's it going to be to get it out? Saving for saving's sake can sometimes get in the way of spending money on the things your saving for. May want to make a list of what would consitute as a Capital expense. It's just easy to keep nickel and diming your way through a savings fund for things that might fall under the Reserves fund.