How to determine HOA dues

We are a small community of 14 homes all recently constructed and purchased. The firs-time and obviously new Board needs to set annual dues. Is there a formula to help determine proper figure. What portion normally goes into a reserve fund?

Tim's advice is spot on, and our budget is similarly structured (though a fraction of his).

Start with what you absolutely need to spend: electric bills, insurance, basic maintenance of common areas (mowing), etc... then what you should spend on other things; i.e. do you need to plan funds for the installation or replacement of trees or other landscaping, will you need to (or want to) add or maintain landscaping around a sign, or add lighting here or there, etc...

While you probably don't NEED a reserve study per any documents/regulations, you should absolutely do one. It's basically looking at your common area items that will need periodic repair or replacement (private drive, sign, clubhouse roof, painting of units if that's among your responsibilities, etc...) basically anything that's a significant cost that the HOA is required to maintain. Item by item, how long will the item last, how much will repair/replacement cost, and how much do you need to save every year in order to have that much $$ when the time comes.

A simple example is an entrance sign. Suppose it will last 20 years and will cost $2000 to replace. You would need to contribute $100 per year into the reserves for the sign. So then after 20 years, you have the $2000 and don't need to have any special assessments to replace the sign. Reserve studies should be updated periodically, too. At least every 5 years is a good rule, though many do them more often.

Good luck!

Assuming that over the 20 years there is no inflation. If life could be that simple.

An adequate reserve plan takes into account both the results of anticipated inflation and the return on investment.

Frankly, taking inflation into account with a reserve study is rather nonsensical, especially with some of the things that are in a reserve study. The inflation rate is not constant, and the things that you need to replace are not tied to the inflation rate.

Take an asphalt road for example. Is there ANY relationship between the price of asphalt and the inflation rate over the past 20 years? Nope. Not a bit, other than both are higher than 20 years ago. Asphalt is more tied to the cost of petroleum than the inflation rate. Trying to do a reserve study to predict what asphalt prices are in 20 years is a ridiculous waste of time. How much is it RIGHT NOW? Budget for that. In 3-5 years ask again...how much is it RIGHT NOW. Change the reserve contribution to reflect that. By the time you get 20 years down the road, the periodic adjustments should have accounted for the inflation rate of that particular commodity.

If you want to do something you think is prudent, throw 5-10% on top of today's figures so you're aiming higher than today. It's just a downside buffer against future price increases, inflation or not.

Periodically reviewing and updating the study is the key.
Trying to balance inflation and return on investment is a bit of a silly game though. Say inflation is 2% and RoI is 3%. They offset to 1%. Your error in guessing the price of anything 10-20 years into the future is WAY more than that.

But estimating on the high side is a good thing to do. Get a handful of estimates in today's dollars for the replacement cost of something. Use the highest one and maybe pad that a little. Good to go. Come back in a few years and update the replacement cost, set a new heading for the ultimate fund size and annual contribution, set off on that course for a few more years.

In our own case, we have a short private road. We received quotes on a sectional repair, partial replacement, re-cap, and full replacement (who knows what the actual needs will be 15 years from now). We budgeted the reserve fund based on the full replacement. Hopefully we're pleasantly surprised in the end.

Virginia, it looks to me like both Tim & Kelly have provided nice sample budgets. They may interest other readers too!

Given the size of your HOA, Virginia--if you're still with us--your budget may not have nearly so many line items (separate expenses) in it.

It's better to save as much as the HOA community can comfortably fund in these early years. Otherwise, you'll end up like our HOA and having to save about 27% of your budget to both build reserves while following a general schedule of replacements as an additional "treat."