As long as everything is working well and looking good in the community, homeowners rarely give a thought to the reserve fund. Because this account isn’t at the forefront most of the time, it’s easy to dip into it for regular expenses or stop funding it. But, mismanaging this fund comes back to the Board when the HOA is unable to meet its repair and replacement obligations. In fact, this is one of the top reasons that homeowner associations find themselves in litigation.
Properly funded reserves are critical to maintaining your community. Small assessment increases are needed to keep up with the cost of living. Avoiding regular increases typically result in special assessments because maintenance expenses continue to rise. Homeowners become angry when they are hit with a special assessment that could have been avoided if the reserve fund had been managed and funded correctly. Angry homeowners can mean lawsuits for the Board and association.
The recent recession was challenging for HOAs, and many Boards saw an increase in the number of homeowners in arrears. Unfortunately, many Boards hesitate to take action or to increase assessments to compensate for delinquent homeowners. So, they often turn to the reserve fund for day-to-day expenses. This makes the bad situation worse because it costs your HOA more in the long-term. Board members have to do the job they were elected to do—get tough with delinquent property owners for the good of the community.
Adequately funding a reserve fund is basic money management. Saving for future repairs and replacement in your community is taking responsibility for the community. Saving for a rainy day (and you know those days will come) is critical to avoiding large increases and/or special assessments.
Improper use of your HOA reserve fund or misuse of the money leads to inadequate reserves, which negatively affects market values. In addition, it also increases the potential for litigation. It’s never too late to get your association back on track. You can start by checking your governing documents, annual budget, reserve funds and state laws. Do what’s in the best interest for every homeowner in your association—find out where your reserve fund stands.
Wise Property Solutions is a property management company serving East Tennessee with offices in Knoxville, TN and the Tri-Cities, TN-VA. Specializing in Condominium Association Management, Home Owners Association Management, HOA Management and Gated Community Association Management.