Updated: Sep 22
Whether it’s care and maintenance of the common property, enforcing use restrictions, or funding reserves, an HOA strives to preserve, protect and enhance owners’ property values. These various functions encourage a better quality of life in the community and safeguard association finances against potential emergencies. Unfortunately, many associations fail to adequately prepare for future large-scale capital projects such as roofing, paving, etc. These expenses are generally predictable but when inadequately prepared for can become an emergency.
When considering association expenses, homeowners are often resistant to funding reserves because they don’t want to increase assessments. In reality, it isn’t a question of if those expenses will have to be paid—but rather a question of when and how those expenses will have to be paid.
What are Reserve Funds?
Reserve funds serve an extremely important purpose—paying for planned association capital expenses. Like an individual saving for retirement, associations can regularly contribute specific amounts to a reserve fund so finances will be available when ultimately needed. People who fund reserves acknowledge the cost of use of community assets (roofs, paving, retention wall, HVAC unit, pool equipment, etc.) and plan accordingly.
For example, a condominium association knows their community’s roofing will eventually require replacement. If specific funds aren’t set aside in advance of such a large project, the full sum must be acquired through other means, such as a special assessment. Special assessments require homeowners to pay their full share of the project in a short period of time (often without much notice). Alternatively, the board can implement a reserve fund where they proactively reserve funds, in order for the full sum to be available at the time the project is undertaken.
Why are Reserves Necessary?
Reserves protect property values and the long-term interest in the community. Without reserve funds, maintenance problems are often “patched” with a temporary fix that is inadequate at best. According to the lakeside park if these hasty solutions become the status quo of your community, a prospective buyer can easily spot shoddy maintenance and will surely factor this into the price they are willing to pay for your neighbor’s home, thus costing you in terms of decreased property value.
How do Reserves Work?
We strongly recommend reserve studies as a tool that enables boards to make informed decisions about their current funding and future capital needs. In a reserve study, an engineer or other professional inspects the common property and forms a long-term reserve plan for each element. This insight is invaluable to boards as they look to the future. After the study is complete, the board is able to budget for each expense and set aside funds for years in advance avoiding future chaos and saving money in the long run.
Large-scale community maintenance is inevitable, but it doesn’t have to disrupt your association’s finances. Plan ahead and allocate appropriately—your community’s future is worth saving for.
If reserve funding and other association duties are daunting to your Board, consider hiring a reputable management firm. Wise Property Solutions, AAMC® is an accredited HOA management firm that provides management plans, practical expertise, and professional guidance to East Tennessee communities in Knoxville and the Tri-Cities.