Question for Treasurers/Board Members: What is the biggest hurdles to managing your reserves?

Hi everyone,

I am trying to learn about the operational workflow of HOA Boards, specifically regarding how reserve funds are managed "behind the scenes."

It seems there is often a gap between what a Board wants to do (fiduciary optimization, better diversification) and what they actually can execute due to logistical friction.

I am trying to identify exactly where the process drags the most.

I am looking to speak with a Board members and Treasurers to understand the administrative reality you face. I’m not looking for financial numbers; I’m looking for the incetive-related workflow bottlenecks, such as:

- The Information Gap: Do you feel you have clear visibility into your options, or is digging up that information a project in itself?

- Compliance Paralysis: Are you paralyzed by the fear that buying a 'safe' bond might still technically violate a state statute (like in FL or CA)?

- The Approval Chain: Does moving funds require physical signatures, board votes that get lost in minutes, or in-person bank visits?

I am not selling a service. I am currently trying to map out the "administrative friction" that prevents Boards from operating efficiently.

If you have ever felt like managing your association’s finances takes 10x more effort than it should, I’d love to ask you a few questions about your experience. Please email me at [email protected] or message me here if you can!

I'd really appreciate it! Thank you for your time.

I did my Associations first reserve study.
It did take time to get the info I needed.
If we had had a clubhouse or pool it would have also taken money for professional evaluations from an engineer.

If an Association has a decent to good reserve study, then problems are minimal as you have a guide to tell you when maintenance is required.

Placing money into the Reserve account (typically a savings account) was treated as an expense to the operation budget and just paid as with any other normal bills.

Spending money from the reserves should require board approval (documented in meeting minutes).
Once approved, the Treasurer would transfer funds from the reserves to the operational account (typically the checking account) and the approved contract for the reserve work was paid.

I often hear that HOAs manage vast pools of reserve funds that sit in bank accounts that generate the lowest possible return. Not even enough to deal with inflationary rise.

As a thought experiment, if HOAs were able to choose easily from various safer, compliant and FDIC-insured investments (T-bills, CDs, Money Markets, HYSA, etc.) while ensuring the lowest possible friction to invest (information gaps in seeing ROI, state compliance, Board and Member approval, reduced middle man cuts), I argue that HOAs would be more financially resilient (to fight inflationary increases per year, to grow their reserves and maybe even pass assessment cuts to members).

My paper essentially argues that "lazy money" (even outside of just HOAs) fails to be invested due to the complexity of the environment it functions in. That, this money, can provide the highest yet safest return to its owners if systems didn't make it complicated. I wonder and hope that I am not just beating a dead horse?

The only way to deal with inflationary rise is by investing in stocks and so taking risk, risk that is legally incompatible with HOA directors' fiduciary obligations.

I am hoping the above is just poor writing on your part. Otherwise it shows a grave misunderstanding of HOA directors' fiduciary obligations. It also suggests that you are on the young side, who thinks that returns from stocks in the last ten years are normal and not risky. Stocks are incredibly bloated right now. They are more risky than usual.
Every HOA of which I know that has meaningful reserves has the reserves invested in either a money market account or CDs.

I have no problem with your arguing that financial illiteracy in and outside of HOAs results in poor investing decisions. But be careful about judging too much, given you may not be up to spread on non-profit corporations' fiduciary duties.

I remember trying to deal with elements of this when I was new to the Board a few years ago.

- One of the biggest issues I had was simple non-responsiveness on the part of the PM / PMC: (with the Board's permission) I asked them to set up an additional laddered CD. The PM said "okay, on it" but never did anything. Complaining to the PMC was no help, and the Board couldn't care less, and so it was more-or-less luck when the PMC was bought out and the new owners were more responsive.

- Still, it was extremely difficult to get information from the PMC and their financial institution. I eventually managed to get them to advise us when CDs were rolling over so they could be re-invested at the highest possible rate. But I was never able to get them to respond about things like 'networking' CDs to maintain FDIC insurance.

- I'm no longer on the Board, but I know that last year the Treasurer didn't allocate any money to fund the reserves because they didn't even know it was a thing. I don't believe they knew what a reserve study is, either.

Just me, but I'm pretty much okay with limiting the kinds of investments that an HOA can make. The Savings & Loan Crisis of the 1980s was largely the result of S&Ls / thrifts being allowed to make risky investments in things like fur-bearing trout farms{1}. Given my experience with HOAs and Boards and PMCs and the people who run them, I think it would be downright foolish to allow them too much latitude in the investment of reserve funds.

Bill

{1} P. J. O'Rourke, Parliament of Whores

Hi ElleN,

To clarify, I completely agree that a Board's primary obligation is to preserve principal, adhere to state laws and governing documents, and avoid speculative risk.

My goal isn't to judge, but to understand why investment friction (like PMC opacity or high fees) exists for some but not others. I’ve heard instances where Property Management Companies (PMCs) are opaque about investment options, or where "middlemen" fees from investment management firms essentially squeeze out the already modest returns from those safe vehicles. I fully admit I might be focusing on a specific segment of the market that lacks the financial prudence you’ve described, which is exactly why I am here—to learn and test my assumptions.

If you (or anyone else reading this) are open to a brief chat, I’d love to pick your brain: https://calendly.com/mehtautkarsh5595/learning-session-reservetrust

Do consider studying the education level of HOA managers. High school graduate (no bachelor's degree) is extremely common. What does this tell you?

If you are writing a thesis or paper for possibly publication, consider not using the word "friction." It is not erudite the way I am pretty sure you think it is. It is not an accurate way to characterize less than optimal management of HOA funds.

A lot of the problem with less than optimal management of HOA funds is little different from the challenges that state or federal governments face. The applicable cliche (for HOA Boards and legislatures alike) is, “If you like laws and sausages, you should never watch either one being made.” Is there a psychology study in this? Group dynamics are an enormous area of research, to say the least.

It's estimated 30-40% of HOA's are self managed. The self managed ones are probably smaller, have less amenities and therefore do not need big reserves or any at all. They also by definition do not have a property management company that makes it difficult to transfer money to higher yield accounts.

I've only dealt with a few property management companies before switching our HOA to self managed, but this is what they have all had in commmon:

1. they force the board to transfer all money over to their prefered bank. This is because certain banks have HOA programs that automate funds collections via lock boxes, automatically reconcile bank statements for the property managers, etc. If they let every HOA they manage choose their own bank it would dramatically increase their work load.

2. Even though most management companies have contracts stating they only manage the Operating funds of the HOA, in practice they also want all the reserve funds transfered to their approved bank. Why? Because the banks give them a kick back,often called Earnings Credits (ECRs), from banks for depositing large HOA funds, which can create conflicts of interest and potentially cost the association lost interest or better rates, as the management company benefits without the board's knowledge, making transparency and contract review crucial. Banks offer these credits to management firms for pooling funds from multiple associations, sometimes giving lower interest rates to the HOA in exchange for these perks, which can be used to offset management fees or boost profits.

3. It is very common for one HOA property manager to manage 10 to 15 properties, they do not have any skills to suggest how to invest funds and even if they did , their bosses don't want the hassle.

I have never worked for a property mgt company, but my general feeling is they will recommend the CD's their bank owns and that's it. They never ever recommend anything better and their CD;s often have a gimmick high intial rate that goes down to some crap interest rate after a year if the board isnt on top of it an reinvest the funds within a 10 day period they allow.