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The drawbacks of Underfunding Association Reserves

Services for Real Estate Pros with Pacific Crest Reserves

March 21, 2010 12:54 PM

HOA Reserve Funds: The drawbacks of Underfunding Reserves

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We hear all the time that association boards want to avoid the confrontation and unpleasantness of raising monthly fees. In fact, sometimes when an association has a "surplus" in their saving account members want to roll back fees because they feel like they are flush and need the money for personal expenses. In most cases this is a dangerous move because when associations need a roof, exterior paint or major repairs it represents a significant expense.

In this depressed economy, association managers are frequently fielding questions from boards about whether they can stop or reduce their funding for reserves as a way to ease homeowner expenses. In Washington State the Condominium Act does not stipulate how much associations have in reserves however FHA does want to see at least 10% of an annual budget going into reserves. Most mortgage underwriters will want to see at least that much and they may even want to see how well the association is funding reserves.

Typically when a major repair or maintenance is needed and there are insufficient funds in the reserve account the board will get the brunt of the criticism. This is also why all association should carry errors and ommissions insurance just in case association members feel like there has been a mismanagement of funds.

This is also when board members' fiduciary duties are questioned. Association members will be asking how did we get ourselves into this position frequently forgotting they were the ones who voted against any fee increase!!!
The only way an assoication board can really know where they stand is to get a reserve study. The reserve study will tell them what the conditions of the common property is and what the costs for the major maintenance items will be. The study will also look at the current members fees and show where the association is in its funding plan for the common property.
Its rare we see an association that is 100% funded, in most studies we have performed the associations are significantly behind in their savings plan. Most can catch up without special assessments but the board will have to take a "tough love" approach with members to get an adequate increase in monthly fees. Its always better to pay small payments that one large bill.