reserves

MikeL13 (South Carolina)
Posts: 83

Posted:

I have seen this topic brought up many times. The dreaded reserve fund. Just when is enough, enough? If a community is 100% funded but now starting to spend for repairs, is that enough? Or should we be 100% plus before the spending starts. How much is too much, 150%, 200%? Now after starting to use funds for repairs with more in the future, is down to 75% or 50% too little and an increase in dues needed? Is there an end? I can understand being underfunded but is there such a thing as overfunded?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Mike,

My understanding is that you can be overfunded, underfunded or fully funded in Reserves.

Reserves pay for the expected repairs and replacement of capital components (streets, sidewalks, pools, club house, storm water retention ponds, roofs, etc.). Since those components are expected to be in place forever, they will always have expected repairs and need of replacement at some point in the future. Therefore, even though the amount of funds placed in Reserves may vary, an Association will likely always require reserves.

To put it another (very simplified) way:

If you bought a 10 year old house, you know that you will need a new roof in 10-20 years. Lets say a new roof will cost $10,000 and you hope for the best of not needing to replace it for 20 years. So you put aside $500 a year (10,000 divided by 20) to pay for a new roof.

In 10 years, you have the roof inspected and it will need to be replaced within 5 years (not the additional 10 you thought you had). Therefore, you now start putting aside $1000 per year to pay for the roof when it needs replaced ((10,000-(500x10))divided by 5).

In year 15 you have the roof replaced. The new roof has a life expectancy of 30 years. Your experience shows it will likely need to be replaced in 25. Therefore you start setting aside $400 a year to pay for the replacement ($10,000 divided by 25 years).

This gets reevaluated every so often and adjusted for inflation and wear (life expectancy). This way the correct amount of money needed to be set aside is set aside so the money is available when the new roof is needed.

Hope this helps,

Tim

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By MikeL13 on 11/17/2014 11:10 PM
I have seen this topic brought up many times. The dreaded reserve fund. Just when is enough, enough? If a community is 100% funded but now starting to spend for repairs, is that enough? Or should we be 100% plus before the spending starts. How much is too much, 150%, 200%? Now after starting to use funds for repairs with more in the future, is down to 75% or 50% too little and an increase in dues needed? Is there an end? I can understand being underfunded but is there such a thing as overfunded?

Mike,

Your HOA board should not wait until it is fully funded to start spending Reserve Funds on scheduled property amenity replacements. Tackle one project at a time, lowering your cash amount while also lower the price burden that comes with paying for the property upgrade - like balancing a scale w/ cash on one side and the Reserve Fund list on the other as a balance.

Yes, you can be over-funded. Over 100% cash in the bank and 100% of your property amenities upgraded and accounted for as Tim explained above.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By MikeL13 on 11/17/2014 11:10 PM
I have seen this topic brought up many times. The dreaded reserve fund. Just when is enough, enough? If a community is 100% funded but now starting to spend for repairs, is that enough? Or should we be 100% plus before the spending starts. How much is too much, 150%, 200%? Now after starting to use funds for repairs with more in the future, is down to 75% or 50% too little and an increase in dues needed? Is there an end? I can understand being underfunded but is there such a thing as overfunded?

Mike,

Your HOA board should not wait until it is fully funded to start spending Reserve Funds on scheduled property amenity replacements. Tackle one project at a time, lowering your cash amount while also lower the price burden that comes with paying for the property upgrade - like balancing a scale w/ cash on one side and the Reserve Fund list on the other as a balance.

Yes, you can be over-funded. Over 100% cash in the bank and 100% of your property amenities upgraded and accounted for as Tim explained above.

SheliaH (Indiana)
Posts: 6,964

Posted:

You might want to pose this question to your reserve study specialist, since the study should be assisting the board in budget planning. If you are overfunded, perhaps some money could be used to set up a contingency reserve account. That would only be used to cover budget shortfalls, association insurance deductibles, etc. Talk to your accountant for more information because there are probably tax implications as well.

Personally, I think overfunding is an issue 90% of HOAs in this country wish they had! Too often, they're underfunded (ours is painfully underfunded and I don't know if we'll ever catch up, although we've been increasing the amount we place in reserves).

And don't forget the interest rate. You probably have your reserves in conservative vehicles because you have to protect the principal of the account. You know how horrible the rates have been, so in fact, you may not be as "overfunded" as you think.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius