Navigating the complex terrain of HOA reserve funds can sometimes feel like evading quicksand. “Reserves quicksand” can trap any HOA board, except the most prepared. Are you leading your community association to financial instability, deferred maintenance, and depreciating property values? To safeguard your community’s health and future, it’s crucial to understand the 7 types of reserves quicksand, how to identify them, recover from their grip, and avoid them altogether. We’ll break each down and show you how to keep your HOA safe from these mistakes forever!
The 7 Types of HOA Reserves Quicksand
1. Hoarding Reserves:
An overly cautious approach can lead to hoarding HOA reserves, where funds accumulate without being used for necessary maintenance and improvements. This can result in deteriorated property conditions and unhappy homeowners, despite a seemingly healthy reserve fund balance.
In a board that’s hoarding reserves, you might hear things like:
“Those are our savings. We can’t spend it.”
“Aren’t we already underfunded? We don’t have enough money as it is, so maybe we shouldn’t spend it at all.”
“Everything’s so expensive!”
2. Depleting Reserves
Have you heard anyone on the board claim “The future is not my problem”? Or is your board constantly transferring from reserves to the operating fund? The future IS in the hands of any current board member. Depleting reserves for non-essential expenses or capital improvements not originally planned will quickly drain your HOA reserve fund, leaving little for necessary repairs and maintenance. When critical needs arise, you may not have enough to fix them, or worse, it may risk the safety of others.
3. Inadequate Collection & Preparation
Failing to collect sufficient assessments or adequately prepare for future expenses leaves the community vulnerable to financial strain. As much as anyone would want to avoid an increase in assessments, they must reflect the current economy. Boards not wanting to “pay for someone else’s roof” can force the HOA to impose special assessments or neglect necessary maintenance. Even if homeowners are pushing back, a lack of proper funds will harm the community’s financial health and overall resident satisfaction in the long run.
4. Apathy
A disinterested or disengaged board fails to recognize the importance of proper reserve fund management, leading to neglected duties and a lack of proactive financial planning. Apathy towards the HOA will result in deteriorating community assets and diminished property values. Remember – these assets are your problem, and you can’t afford to put funding reserves off.
5. Uncertain Reserve Spending
Boards unsure of when and how to appropriately spend HOA reserve funds may either overspend on unnecessary items or hesitate to fund essential repairs and replacements. This uncertainty can jeopardize the community’s physical and financial well-being.
6. Fixation on Percent Funded
Obsessing over achieving a specific “percent funded” level without considering the community’s unique needs and circumstances can lead to misguided financial decisions. It’s crucial to focus on the actual condition and needs of the community rather than this simple benchmark.
7. Indecision
Failing to make timely decisions due to fear of making mistakes or settling without guidance can be as damaging as making outright, poor decisions. Indecision, particularly in financial matters, will bring missed opportunities for maintenance and improvements.
The First Steps Out of HOA Quicksand
It’s okay to say “I need help.”
As board members, you’re responsible to fulfill your fiduciary duties:
- Duty of Care: Focus on the overall health of your community, both financially and physically.
- Duty of Loyalty: Prioritize the community’s well-being over individual interests.
- Duty of Inquiry: Seek information and make informed decisions about your reserve needs.
The Business Judgment rule empowers you to rely on expert advice when dealing with your HOA reserve fund. Don’t feel ashamed to say you need help – that’s what professionals are for!
Seek Professional Help: Connect with a credential reserve study professional and an experienced manager, whether they’re an onsite manager or portfolio manager, with at least five years under their belt. If you have a newer manager that may not have the experience, reach out to the management company and ask to speak to higher roles like the vice president or a district manager so you can connect to the best resource for your HOA. They’ll provide invaluable guidance and put you on the right track.
Leverage Your Reserve Study: A reserve study is your window into the future. It identifies upcoming expenses, allowing you to plan and prepare accordingly. This empowers you to: anticipate major costs, create a unique roadmap for your HOA, and make informed decisions rather than relying on guesses.
- Adjust your budget: Allocate funds towards reserve contributions as needed.
- Raise assessments (if necessary): Do what’s best for the community’s long-term health, even if it’s unpopular.
- Move slow and steady: Getting out of quicksand takes time. Don’t expect overnight miracles.
How to Avoid HOA Quicksand
Successfully managing the challenges of HOA reserves quicksand requires proactive management, trusted guidance, and a willingness to act decisively for the community’s long-term benefit. By understanding the various forms of these HOA reserve fund mistakes, getting expert advice, and adopting a smart approach to management, your community will remain vibrant and financially secure. Remember, the ultimate goal is not just to avoid the quicksand but to fulfill your responsibility for the entire community (current and future).
Use Free HOA Resources & Tools
When it comes to HOA decisions, we’ve got your back! We offer a wealth of free resources to empower you and guide your community towards financial stability.
- Don’t miss any of our FREE webinars! Join our mailing list to watch the next one or subscribe to our YouTube channel.
- Tune in to HOA Insights – our weekly podcast, designed for HOA board members and managers, where we offer practical tips weekly! Find it on major podcast platforms, www.hoainsights.org, or watch it on YouTube.
- Our interactive online reserve calculator, uPlanIt, lets you explore different budgeting scenarios and see how they impact your reserve fund in real-time, risk-free! Learn more about uPlanIt here.