Reserve studies determine the ongoing health of the development and act as advisories on how to best keep reserves up and spending in check.
Financial Options for Low Reserve HOAs
When HOA reserve funds for a community become perilously low, it places the development at risk when planning for the long-term and helping keep emergencies at bay. There are, however, many strategies a property manager can employ to assist a board when reserves become low. The most important thing is to not panic because, in truth, every HOA increases its reserves month to month, so remind the board that Rome was not built in a day, and reserves will be built up over time with judicious planning.
When Low Reserves are Unavoidable
No matter how well an HOA's reserves are funded, emergencies can always occur. While the board must remain proactive with community maintenance, there are times when even the most diligent of boards can have property issues that wipe out a great deal of accumulated reserve. It is, on the whole, easier for larger developments to absorb large losses to their reserves because their monthly dues can help build back up the reserve fairly quickly.
With small HOAs, restoring reserve integrity may prove to be more difficult, hence the property manager's assistance may be necessary for providing much needed financial direction. No board member wants to neglect his or her fiduciary duty, so a consultation with the management company in providing ideas may help get over the "we have no money to do this project" hump may be just the salve needed during the slow and sometimes difficult reserve build-up process. In some cases, assessments may be painfully necessary when reserves are underfunded.
Risks of Underfunded Reserves
with low reserves comes the immediate risk of not being able to perform large emergency repairs, but other risks come with lack of backup funding for those repairs. Reserves reflect on the financial standing of the HOA, and of the board itself. While many repairs coming during one particular year may deplete reserves for a time, the board not being attentive and continuing pattern of underfunding reserves should be addressed by the property management company. Its expertise is eminently valuable in helping rein in an overspending board of directors.
Risk 1: Special Assessments
Since board members are not expected to know the exact reserve level at any one time, it's up to the property manager to remind them that they cannot do a project because association reserves are low. Depending on how crucial the project is (for example, tenting the complex to forestall termite encroachment), the situation may call for a special assessment. How special assessment votes are conducted depends from state to state, with some states leaving it up to property documents, while others use statute as the ultimate arbiter. Property managers can help guide boards in this process, assisting how to conduct secret balloting process.
Risk 2: Property Devaluation and Selling Difficulty
It may be a detail of the selling process that many HOA members do not think about, but it is vitally important: they should know what their reserve level will be before they sell your property. If it is underfunded, they should know why, when it happened, and how long it may take to restore funding. It may be wise to wait, with assurances from board and property management company, that there are no other projects anticipated in months to come that would further deplete the reserve.
If waiting is not an option, a low reserve may prove advantageous to a future buyer, but not so for the homeowner looking to sell. In such cases, it would behoove the seller to consult with the property manager to obtain a copy of the most recent reserve study. The property manager can remind the seller that his or her selling price may erode comparable property values in the neighborhood. Worst-case scenario, a potential buyer may back out of a deal if he or she is not able to obtain a loan due to a low reserve.
It is easy to understand why a new buyer would second guess a decision to purchase a property with an underfunded reserve. A low reserve may indicate a property that incurs a lot of maintenance cost. If the maintenance is ongoing, it may mean continued increases in association dues. This is why access to the reserve study as well as input from the property manager is so important.
Financing While Growing Reserves
Every property management company has resources available when a homeowners association is crying out for funds during times when reserves are low. As a stopgap solution, financing is a boon to underfunded reserves because, while the payments required may be temporary stressors on the future monthly contributions to the reserve, financing could provide a solution to addressing short-term problems before they turn into long-term larger expenses.
When obtaining a loan to avoid tapping into reserves, the finance company considers the homeowners association in much the same way as an individual borrower, with one exception: every homeowner in the association will undergo a credit check. When there is a history of one or more homeowners being late with paying dues, the prospect of obtaining a loan lowers. At this point, it is up to the board in concert with the property management to make sure all dues are current. If a collection agency is required to keep dues current, it may be worth it for the HOA to pursue this option.
Reserve Studies: Remind the Board
Homeowners associations, as a matter of course, should conduct a reserve study every 3 years. Reserve studies determine the ongoing health of the development and act as advisories on how to best keep reserves up and spending in check. They, with help from the management company, will help assist in providing direction on where to spend money most effectively. Reserve studies may not be top of mind to board members, but they are to property managers. It's vital for property managers to not only remind the board of the importance of the reserve study but to make sure it's scheduled prior to annual meetings or periods of low reserves. The board may feel panicky during periods of low reserves - but as a voice of experience and calm, it's crucial for the property manager to remind them that with time, the association will emerge healthy again.