Managing HOA reserve fund accounts is not easy. Done poorly, homeowners associations can easily deplete their reserves to cover other expenses. However, maintaining ample reserves is crucial to financial health. The community might suffer bigger losses if it foregoes proper reserve fund management.
Best Practices for Managing HOA Reserve Fund
No matter how well you prepare for it, emergencies happen to the best of us. HOAs might face lots of different crises like earthquakes, fire, or acts of terrorism. In these cases, one way to protect the community financially is to maintain ample reserves. Here’s what you need to know about how to manage HOA reserve fund accounts.
1. Perform a Reserve Study Periodically
What is a healthy reserve fund? There is no universal amount recommended for all HOAs. It truly depends on several factors, such as the HOA’s size, amenities, and exposure to risk. To determine a specific community’s ideal reserve amount, conducting a reserve study every few years is best.
A reserve study is a financial analysis performed by a reserve analyst or specialist. The conductor examines the HOA’s foreseeable capital improvements, upcoming repairs or replacements, current reserve accounts, and the condition of all HOA property. Based on these factors, analysts recommend how much the HOA should keep in its reserve account.
Reserve studies are not one-time events. In many communities, the CC&Rs or Bylaws require the board to conduct them every year or every few years. Even without these requirements, though, it’s usually a good idea to conduct the study at least once every three years.
2. Set a Goal
How do you account for reserve funds? After conducting a reserve study, the HOA may aim to maintain a certain percentage of the ideal reserve funds to remain healthy. Ideally, reserve accounts should be fully funded. However, maintaining a 70% funded reserve account should be a decent level to aim for if the community is underfunded.
The HOA can slowly work its way toward the goal. Board members may increase the assessments incrementally to achieve their desired funding. This way, the residents won’t face sudden hikes in HOA fees.
3. Create a Separate Account
Homeowners associations tend to combine funds in one bank account. However, this is not a good idea when it comes to managing HOA reserve fund accounts. An HOA that does this risks accidentally dipping into the reserves when it isn’t necessary.
Instead of mixing the funds, consider other avenues, such as other banks or money markets, to ensure the reserves are untouched and still earn interest. HOAs can also invest in certificates of deposit (CDs) with varying maturity intervals.
4. Look for a Secure Place
Regardless of where the HOA keeps the funds, the board should ensure that it’s secure. HOAs can consider banks and institutions with Federal Deposit Insurance Corporation (FDIC) protection. Keeping the reserve funds within the FDIC limit is also good practice.
HOAs may also create deposit accounts in institutions with experience running community association deposits. For example, services like the IntraFi Cash Service (ICS) network allow HOAs to distribute their reserves among several banks to ensure they’re all protected by FDIC coverage. Despite having multiple banks, the HOA only works with the ICS to manage its reserves.
5. Prioritize Return and Liquidity
Accidents happen, so HOA reserve funds need to remain liquid. The board should be able to easily access the funds should any unforeseen expense occur. In addition, the board should consider interest or returns. The reserves shouldn’t just remain safe, depreciating in value. That’s a bad business practice.
Instead, the reserve account should earn ample interest to keep up with inflation. While security and liquidity come first, earning interest should also be a priority. The board should build a good relationship with their bank or institution of choice. That way, they can assist the HOA and explain their options for increasing the reserve funds.
It’s also a good idea to periodically review the interest being earned on the current reserve accounts and inquire about any new programs that might yield higher interest. These offerings will vary by bank and account terms, so make sure to ask them every now and then.
6. Be Transparent in Accounting
Homeowners associations must be transparent about their financial practices and decisions. The residents might not like it when the HOA has to increase their fees to account for the reserves. Nevertheless, they can understand more if they see why the community needs the money.
The board should always communicate the purpose of the reserves. In fact, they can even discuss the reserve study results with the community members so they have a clear idea of the HOA’s current standing.
Apart from this, it’s equally crucial to separate regular assessments from reserve contributions in the account books. Noting each item separately in the income sheet can paint a more accurate picture of the HOA’s current status. Homeowners can also more easily see where their money is being spent.
7. Educate the Board
HOA board members are not always legal or financial experts. They rarely have financial or legal backgrounds. Hence, they might not know why the reserves are important and how to manage the funds wisely. HOAS needs to educate the board members about proper reserve fund management.
In addition, HOAs should review the legal or regulatory requirements regarding reserve funds. For instance, California HOAs are required to conduct reserve studies regardless of size unless the replacement costs are below 50% of the HOA’s gross budget. Keeping regulations in mind will ensure the HOA operates at full capacity and protects it from liability. It may be wise to ask an HOA attorney for help in board education.
Similarly, HOA board members must know how to read financial statements, understand reserve studies, and handle HOA banking. They may ask an experienced accountant for help or attend workshops to learn the ropes.
For the Community’s Protection
Managing HOA reserve fund accounts can be difficult for inexperienced board members. Nonetheless, the time and effort it takes to learn what to do and how to maintain ample reserves will pay off. A fully funded reserve account can save the HOA from financial crises during emergencies and rainy days.
Condo Manager is the best community association management platform for self-managed associations and HOA management companies. Contact us online or at (800) 626-1267 to learn more!
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