Is 10% of Budget to Reserves a Law?
Click here to see a list of laws we compiled from across the country with respect to Reserves. While 30 states have some legal requirements, the "10% of budget to Reserves" is not a law. But it's something you want to do.
Due to the financial meltdown that began approx 2008, more lenders are particular with respect to making loans. Fannie Mae, Freddie Mac, and FHA have enacted a requirement that Reserve contributions comprise at least 10% of total budgeted assessment income (Note: this only applies to condominiums, it does not apply to planned development or home-owner associations). So if your association dues are $200/mo, Reserve contributions need to be at least $20 of that $200, or you'll need a Reserve Study justifying a lower number. Such a lower number would be exceedingly rare, as most associations require 15-40% of their total dues going towards Reserves to offset ongoing deterioration. If enough Reserves are not set aside on an ongoing basis to offset deterioration, there will be insufficient funds to pay for a new roof (or whatever major common area assets your association has), and owners will need to kick in funds via a special assessment. Such a special assessment could be very destabilizing for an owner barely making their mortgage payments. "10% of total budget" Reserve contributions are likely inadequate, but it's what lenders have chosen to lower the chances a special assessment will occur that would cause a homeowner to default on their mortgage payments! That's just the reality of the lending situation at this time.
Our firm is the largest provider of Reserve Studies in the country. We help our client associations avoid surprises and become prepared for their inevitable major common area repair and replacement projects. If you don't know how much to be setting aside to adequately offset ongoing deterioration, click this link and request a proposal. We can tell you with confidence what to Reserve for, what your current risk of a special assessment is (based on how much you presently have in Reserves), and how much you should be responsibly setting aside at this time.
If you don't want to hire a Reserve professional, change your budget so Reserve contributions are at least 10% of the total. That will get you into the ballpark and significantly increase the "sale-ability" of units in the association. Trust me, an increase in a few thousand dollars in sales price nicely offsets a few bucks a month of increased dues! It is without question the right thing to do.
You're just fooling yourself if you think it is advantageous to keep dues low by avoiding Reserve contributions. The pain, disruption, cost, and unfairness of a special assessment typically is something boardmembers don't want to do twice.
Either you pay Reserve contributions on an ongoing basis, or you'll pay it later by way of a special assessment or lower property values. It's cheaper and financially in the best interests of all homeowners to make appropriately sized Reserve contributions an ongoing basis. Click here for an article on the topic.