Implications of not funding roof reserve early on

Our annual meeting is next week and the residents are a bit fired up about my proposal to raise fees by $6-10 a month. Our roof was replaced by insurance claim in 2012 and I've taken the extra money from the settlement and placed it in reserve at $5k/year ($5k x 20-year roof = $100k replacement cost in 2032).

We're taking on some new expenses this year and going forward, so the fees have to be increased. However, if we ditched the roof reserve, we could afford the additional expenses without having to increase the fees. That's a terrible idea, and I have to find some way to convince the community that we need to operate responsibly rather than thinking of ourselves at our current point in time.

The main argument most have is, "I'm not even going to be here in 2032!" They say they'll have long since moved away or they'll be dead. My response is this: "So long as that roof is keeping rain water and melting snow off your appliances, you electronics, your furniture, and anything else you own, you have an obligation to contribute to the cost of its natural wear and tear while it is providing you those benefits." That usually silences a few dissenters, but there are still those who think only of themselves and cannot grasp the concept of thinking of our community's future.

Some other arguments I am preparing to use at the meeting:

- Not funding the roof now means the future residents will have to take on a sudden increase in their dues in the association's haste to properly fund the roof reserve before the replacement date
- Late funding of reserve can also affect a lender's likelihood to approve a loan. If we're ten years into the roof and we have no reserve whatsoever, the lender's underwriters will look at that as a red flag and conclude that the HOA will have to jack up the fees which could present difficulties for the buyer paying their mortgage payments on time.

What else can I use here? I need really good ammo.

It's very simple.

A properly funded HOA's dues payers cover the cost of reserve fund items as those items are being used. They are NOT paying for the new amenity in 2032 but there will be enough replacement cash to install a new roof when the time comes with no assessment. A 20-year roof will result in existing residents paying 1/20th the cost annually.

If resident moves in on the 19th year, they'll pay for using the roof 1/20th of its life. It's inherently fair and it's ethical. Your thinking is straight but many of your residents simply don't care about this.

Keep in mind that the other option is simply not to take on the new expenses. The Boards #1 responsibility is ensuring that they can and do maintain what they currently have.


When we did our first Reserve Study (just 5 years ago), we needed to increase assessments by 20%. Such an increase required membership approval and I heard the same type of story.

The argument I countered with was that lenders, due to government regulations created when the housing bubble hit, are now looking at the financial health of the Association when considering loans. If the financial health is poor or shaky, the loan may not be made or may not be approved for the amount desired. If loan are not approved, prices will need to be lower to sell. This will lower property values.


For those who have problems grasping the concept, I used a different approach and explained what reserves were and why it was best to put money aside.

Attached is an article I wrote for our Association newsletter. Perhaps it will help you find a way to better explain the issue. Some of the links I provided earlier in the thread may help do this as well.


Nobody will care about future residents. They only care about themselves and their families when it comes to money. So this is a poor argument.

Instead, explain that if funds are not available when the roof needs to be repaired or replaced, a special assessment will be required.

If you are selling, By law, the Association must inform lenders of special assessments (this is part of the financial health the lenders are looking at). This could have an affect on a borrowers affect to have the loan approved.

If you are still a member of the Association, a special assessment is another unplanned for expense like your car suddenly breaking down and needing a new transmission (A/C, etc.).

It's typically easier for every family to put aside $5-$10 per month as an emergency/rainy day fund in case something happens then to pay for a large expense (like a new transmission) without setting aside any savings at all. If you are on a fixed income, having to pay a $1,000 or more special assessment could be very difficult.

Again, relate it to how it impacts them now.

Remember, you will never get everyone to approve an increase in assessments. There are some residents who simply won't approve any increase. Therefore, ignore trying to gain their support. Focus on explaining the issue to the fence sitters. All you need is enough support to approve the increase. Typically this isn't a 100% approval requirement.

Ron,

As I stated, our first study was done after the Association was almost 30 years old. Had we started putting money aside earlier, one line item alone (milling and paving of our roads) in the Reserves could have had the amount being placed into it cut in half. I'm looking forward to the milling and paving to take place in 2021. Because after that, we can cut the funding into the Reserves by $10,000 a year. This could cut assessments by 8%.

Everyone's responses -- especially Tim's -- are good. I will get to those soon, but I'll answer this easy one for now.

Basically, our board has been operated poorly in the past. We have common areas local to each unit that, until I came along, were thought to be the responsibility of the members. Because of this misconception, the board has never hired service providers to tend to these areas and the unit owners have stopped maintaining them.

New landscaping was also added alongside our buildings in 2013 and the board at the time didn't hire anyone to tend to these because the president was doing it himself (he was moving and most likely didn't want to tell everyone they'd have to pay for it after he left).

We've also never properly funded any reserves and there have been times when we've had next to nothing in the bank. After an insurance settlement in 2012, we were able to stash a large sum of money in our account, but now it's time to start hiring service providers to care for these nasty-looking common areas while also funding the roof reserve ar $5k per year and the misc reserve at $1k per year (I stashed some extra settlement money into this one for good measure).

Also, you're right that insurance will cover major disasters, but there's the deductible which would be paid out of our reserve.

For the percentage, we bring in about $31.2k annually and stash away $6k per year, so that's about 20%.

You need to point out how ridiculous that argument is:

Properly funded reserves are a necessity if one expects to be able to sell their home.

To sell a home in an HOA-type community, banks, and especially where HUD, Fannie Mae and Freddie Mac loans are concerned, insist on properly funded reserves.

A. Without properly funded reserves, lenders are unlikely to write mortgages for prospective buyers, which means that your residents will have to rely on cash buyers. Wish them good luck selling the home if they plan to move away.

B. If the resident dies, the heirs will probably want to sell the home and will be faced with the same problem.

Bruce

Typically reserve funds cannot be used for anything other then down the road, designated repair/replacement items such as roofs. They are not to be used for "improvements". Now it is true that Reserve Funds can be "borrowed" from but there has to be a strict plan in place to repay the Reserves.

In your case I would argue that "improvements" must be paid for on their own, not paid for from the Reserves.

OOPS..I was replying to the OP's (Ron) original question....my bad

Actually, without a Reserve study, there is no way to know if the Reserves are funded or not, or at what percentage they are funded.

The study says what is needed.

Without a study, you are simply putting money aside and hoping for the best.

I agree with you both too. and with 20 units, a study shouldn't cost a whole lot! (Our very complex 211-unit high rise twins only cost about $1,500 last year)

What we do know, If I understand Ron correctly, is that they are setting aside enough each year for their roofs so that they're 100% funded for that component. Now that assumes the estimated replacement cost is in the ballpark, and they're building in an inflation factor each year.

I know that Tim & his HOA did their own reserves study because it's not very complex, so maybe Ron can too.

It's the other components in his HOA that Ron hasn't told us about--might only be a very few???

Cost also depends on whether an independent reserve study was done previously. Kerry's is probably an update. Tim's is probably considered a first time study.

My OOPs this time, John. I responded before I read your later post.

In our area they are called Reserve Specialists (RS).

Funny how the same job can have multiple titles.

Good to know Ron.

Thanks for the update.