High Reserve Amount and Unexpected Expenses

I am a firm believer that a high percentage fully funded reserve account is not only wise financially, but also the best method to increase property values and attract buyers. With so many HOA's nationwide poorly funded, it's the HOA's balance sheet is one of the first things I would look at when deciding to buy-in to a specific HOA.

With macroeconomic uncertainly lately due to unexpected events, I think having a solid "rainy day" fund is imperative.

My HOA thankfully does not have common roofs. The largest expense are the roads. What are some unpredictable, unforeseen expenses that could doom an HOA financially to where there would be a need for special assessment or a bank loan?

If the housing market tanks, owners whose house is worth less than what they paid for it, or who are counting on their house as their primary investment for their retirement will be adamant that a 100% fully funded HOA start spending money on cosmetic improvements they think will improve property values, but are completely subjective as to whether or not they will. Instead of repeated the recommendations of reserve study professionals and financial planners, what are some examples to use of unexpected expenses to prepare for?

I’m not following, again.

The HOA is NOT responsible for anyone's cosmetic improvements. Just the ENFORCEMENT of it. Hate to agree with Mark18 on anything but this time he is very right. Home values have absolutely NOTHING to do with a "fully funded HOA". They are apples and oranges.

Home values again are based on REAL numbers. Not numbers you want to assign to them in your head.

Let's clarify. A reserve account is NOT a "Rainy day" reserve. A "rainy day" account is more fluid and works more like a regular savings account. Reserve accounts are set up for capital improvements or high dollar maintenance. Reserves are for roof replacements, retention ponds, or road maintenance type of items. A "Rainy day" is for those unexpected expenses like Tim said an insurance pay out or some type of damage.

When we talk insurance pay out, the reality of HOA insurance isn't a Million dollar payout on a million dollar insurance policy. It's more like 80K. So if your HOA got sued tomorrow, it may have to fork over up to a 20K deductible AND still be on the hook for whatever excess of 80K is won. Judge rules a 100K payout, your all on the hook for 20K etc.

That is an example of one of the unexpected high dollar expense you may experience in a HOA NOT covered by reserves. You can combat it by changing the policy. Which could cost more money for more coverages.

Again I think you are greatly confusing HOA responsibilities and funding equating to home values. It doesn't work that way. High assessments most likely will drive people away. Plus one doesn't live in a protective bubble in a HOA.

An HOA with poor a poor financial statement and/or coupled with high monthly dues and special assessments deters buyers and lowers property values. It is common sense, but if you want proof, just do an internet search for well funded HOAs and synonyms thereof and a plethora of confirmations will appear.

It does NOT deter HOME VALUES!!!! It deters people from buying into that particular HOA. That does NOT mean your house is valued less. Just means it's less value to potential buyers. The bank still considers your home valued at a certain amount of money no matter if you put it up for sale or not. That value is HOME VALUE.

The mortgage company loans based on either the purchase price or the appraised price, WHICHEVER is lower. The value of the home is what someone is willing to pay.

If you list your home for 500K and multiple offers come in a seller settle for the $600K, that is the purchase price. Then an appraiser comes in and appraises it at $550K. The buyer would need to come up with the $50K difference in purchase price and appraised price, plus any down payment requirement.

Next time a home sell in that area, the $600K becomes part of the new equation.

What a bank will look for from the association is sufficient reserves, number, not amount, of delinquencies and number of rentals. A buyer, beside the house, should be looking at the care of the amenities they would be paying into.

I certainly did when I puchased. If one considers their house their primary investment, the HOAs reserve account funding is critical in a purchase decision.

FHA lenders will take into account reserves and reserve studies, per specific guidelines. I can see this having a bearing on property values. (Of course, whether a condo/hoa wants owners whose FHA loans translate to down payments that are minuscule and also bad credit scores is another issue. I guess if the Reserves are healthy, at least these FHA borrowers are less likely to be hit with a special assessment.)

So, NpB, your hypothetical sellers will not want to spend from reserves??? But that's what you claimed. But, they WILL want to add items paid for out of your operation budget? So what? Just say no. You're also speculating that "they" would want to expend more on some reserve items than they're current estimated value is, e.g., raise the height of the perimeter fence. Again, so what? What, btw, is the estimated value of that fence? What is its remaining useful life (RUL)?

I have a feeling you're not really comfortable about what are reserves components and what aren't. You do have a pool and they need to be resurfaced, their pumps need to be replaced, the decks around them needs to be repaired or replaced, etc. That's not chump change. I'd asked for you to name your reserves items and I guess you won't or don't know how. Are you sure all components you should reserve for are in your reserve study? When was the last time you had one done?

Our certified reserves specialist says, no, JohnC. He states that the reserves would cover the cost to replace the wooden fence. The HOA would have to find a different source to any for the additional cost to have a more expensive one: Special assessment; make room in the operating budget for the additional cost if near the beginning of the fiscal year; borrow the difference from reserves with a pay back plan in a letter to owners (may be CA Only).

I agree.

What FHA guidelines ask for is that 10% of budgeted expenses go into reserves. A lower amount would be consider if a reserve study was done within the previous 24 months.

I have a couple of FHA applications, so I do know what they require.

Only if they know what to look at...LOL

We have a few items we have reserve accounts for that are not "typical" reserve items. Mainly because cost estimates can't be reliably estimated and also because they don't have any sort of expected "useful life". The two big ones that come to mind are insurance deductibles and a nebulous item called "drainage".

Our CC&Rs call for the HOA to cover any unfunded insurance deductibles and allocate that cost back to the homeowners as additional assessments. To make a long story short, with our current 2% windstorm deductible, we could be on the hook for approximately $300,000 in deductibles. This number obviously changes every year (and we've been told to expect a 10% hike in premiums this year). So do we maintain a fully-funded $300,000 reserve for unpredictable insurance deductibles, or do we reserve for a lesser amount and plan to make up for any shortage via a special assessment? Right now we're in the middle and it's something we struggle to communicate to the homeowners every year and especially the new homeowners every year who have a hard time grasping how our insurance works. When people find out we have hundreds of thousands of dollars in a reserve fund we may never need they don't always react well. So we do reserve for that, at least partially.

Drainage problems in Florida are common. Sometimes it's a pump for the irrigation system, sometimes it's dredging a lake. Sometimes it's digging new swales or ditches. A lot depends on the weather and the requirements aren't always predictable. So we do maintain several tens of thousands in reserves for those things. Some years we spend a lot. Some years we don't spend anything.

So then the owner who wants the HOA to spend 30% of the association's funds on raising the perimeter wall because he/she thinks it will raise property values must be financially ignorant?

Let me put it this way. If you tell me that if I pay in an extra $100 for a special assessment for a wall to be fixed/improved my home will sell for an extra 1K? How would you know that my home or my home value would go up 1K if I spent an extra 100 dollars today? How can you add an actual dollar figure onto the value of one's home because of that improvement/change? This is why I say REAL #'s. Otherwise you just added $100 in extra home value...

About a month ago I asked our property manager how many times perspective buyers had asked him for financial information or a copy of our rules and regs. He said he could remember 3 people over the last year. There have been approximately 20 sales during that time. When I bought I was ignorant and didn't ask. I'll never make that mistake again but my experience here is that the vast majority of buyers and even owners are clueless. Sad but true. We are an older community and I have no idea if that plays a part in the problem.

Ys they are especially those first buying into an association. Most do not have the foggiest idea how an association budget, reserves, assessments, etc. work.

Be gentle-they'll appreciate the education. If they don't, so what?

Depends on what definition of ignorant you are using.
1. lacking knowledge or awareness in general; uneducated or unsophisticated.

Yes seems to fit this one except for the sophistication part.

2. lacking knowledge, information, or awareness about a particular thing.

Absolutely, many buyers seem to fit this definition

3. INFORMAL
discourteous or rude.

Nah, this one is out.

Unfortunately, ignorance has taken on a stigma of being the same as stupidity.

My understanding of it has always been "uninformed", or just "don't know". I've never thought the word was demeaning and I use it all the time in a non-demeaning way. If people have a problem with that, then that's not my problem. Maybe it's a regional use thing.

As evidenced by what? I do not think salary correlates at all to smarts. The pay gap between low income workers and executives has exploded. Does that mean executives have become proportionately smarter? Of is this just the machinations of corporate America?
I would call him ignorant.

Enough of the semantics on the word. I am done with that part of the post.