The Illusion of Being Fully Funded - Reserve Funds

19.1 23 illusion sq

You already know what disrepair does to property values. The illusion of “high reserve fund security” can give owners and HOA board members a very unrealistic idea of where they stand financially if they haven't kept up with maintenance and replacement.

This HOA association in a ski resort town had $1.5 million in reserve funds. I naturally thought of it as being well-funded for a 46-unit townhome association.

Boy was I wrong. But even upon my first impression at the site, I believed that this homeowner association was extremely well-funded, way above 80%.

What an illusion! Unfortunately, my inspection showed an extensive amount of deferred maintenance and disrepair, enough to cause major dismay.

It was apparent that the association had not been spending their reserves to fix major projects such as roofing, siding, and roads. Even smaller projects were neglected, such as decks and balconies that were falling apart. I’m sure the homeowners and tenants were quite unhappy with that situation and I shudder to think of the liability issues.

Now, some reserve analysts say that there is a direct percentage correlation between the amount of money in the reserve fund relating to the value of the units; in essence, the higher the balance in the reserve account, the more each owner’s unit is worth. Not so.

I can tell you that this is a misguided perception that often causes the HOA to ignore deferred maintenance - and then the place falls apart. You already know what disrepair does to property values.

Consequently, the HOA must spend the reserve money to bring the buildings and facilities up to good repair, which may deplete most or all of their reserve fund account.

In this case, the amount of money to repair the siding and roofs, to rebuild balconies and decks, and generally get the place into decent condition, was enough to substantially deplete the reserve fund, down to almost nothing. That’s not a comfortable situation for the property manager or the board members.

The illusion of “high reserve fund security” had given the owners and HOA board members a very unrealistic idea of where they stood financially and in respect to their reserve funds. It’s absolutely true that if an association has a high reserve fund but has not repaired anything, the inevitable ‘falling apart’ occurs. Plus, factor in that procrastination usually makes everything worse.

But don’t despair! I presented the HOA Board with several alternative funding ideas. They decided to fund their repairs with a mixture of increased reserve contributions and special assessments per year, splitting that cost over time, and without completely depleting their reserve fund.

Although unusual, this management strategy worked out to be a good plan for their association which was used to spending money from special assessments only and not from their reserve funds. Several of the major repair and renovation projects are already underway. I’m sure the owners are looking forward to seeing their HOA looking sharper than it has in the last 20 years.

Contact us for more information. We're happy to help!