HOA fund reserves, what level is enough

Most HOAs have two budgets. One account is for your operating expenses like the items you mentioned--snow removal, etc. Some of these you pay monthly and some annually (I guess).

Another is your reserves account in which $xx a year per owner is collected to replace or do major repair to items on your reserve schedule. If you only have a road that will require major repairs or replacement, you want to contribute enough so that you'll have funds available when the road wears outs.

To know how much to collect, you need to know how much longer the road is estimated to last and the estimated cost to replace it.

Let's say your reserves account is at $0, Your road will last 10 (more) years, and it will cost $10,000 to replace. This means owners will need to contribute a total of $1,000 a year to replace that road in 10 years. If you do this, it's said that your reserves are 100% funded even in year one. Another way to say this is "fully funded." At present, we build 3% inflation.

Now, $1000 a year + the additional contributions that owners must make to your operating budget might make $1000 per year too heavy a burden on owners. In that case, you could seek a smaller total each year, say $500. After year one, you'll be 50% funded. In a couple of years, you could increase the annual total for road replacement gradually to get closer to the needed amount by year 10.

If you don't start collecting for reserves, and your'e right not to want this, you all will indeed face a special assessment. Two groups dislike those. Owners are one! Lenders also don't like HOAs whose reserves are skimpily funded.

Are the street lamps your HOA's responsibility? If so, you'll want to reserve for them too, but the light bulbs would be a part of your operating budget.

Try to save the amount needed to fundamentally replace the road when it reaches end-stage. Yes, you'll likely never pull up the entire road, lay new gravel and top with asphalt, but over time, you will do it piece-meal.

Get the value of replacing the road - asphalt removal + new asphalt - as of 2014. Pick the year in the future when you could reasonably say the road needs comprehensive rehabilitation (2034?), set an inflation rate (2.5% or 3%) and see what the cost will be in that future year. Once you have that price - which is an estimated guess - divide the price by the number years left until you reach the end of life of that road. That will tell you how much to save annually until you hit the year at which an old road needs extensive asphalt work.

Example:

Your road would cost $100,000 to replace in twenty years or the year 2034.

In 2034, if inflation runs an average 3%, the road will cost an estimated $180,611.11 to replace

Since you have twenty years to save that amount divide 180,611.11 by 20 = $9,030.55 per year in savings....of course, round up to the dollar amount of your choice.

I would argue "sufficient reserves" is reached when you can replace that road in whole with no lump sum collections - $180,612 (but I'm conservative with savings because nothing works or costs as expected)

Actually after I posted I found a couple of posts related to the cost study/analysis which is pretty much what I assumed was needed. I'll look into this, as mentioned it's pretty simple the road, mailboxes, and streetlights are all that we own!

Nobody to take over the roads, we're in a rual township so the county maintains them.

Marq,

Since you do have roads/parking areas to maintain, be aware that costs for milling/paving (replacement) can vary a lot depending on the price of oil, the size of the job and the company hired.

When we last looked at costs in 2012 it ranged from $14 to $20 per square yard of road (we have about 12,000 square yards). Our milling and paving is scheduled in the Reserve Study for 2021. We are expecting the job to cost about $250,000.

What I'm saying is that even with a Reserve study, the actual cost of replacement can be higher than expected. Therefore, it's best to start saving now so a special assessment, if needed, is minimized.

You can do a internet search of Reserve Companies - Michigan or visit the CAI Michigan website http://cai-michigan.org/ and look under their Service Provider Directory for Reserve Professionals.