Why do homeowners’ associations (HOAs) collect fees? Generally, the HOA’s funds fall into two categories: the operating funds and the reserve funds. As a homeowner, you’re probably wondering why the board has to collect these fees in the first place. In this guide, we’ll go over the purpose of these funds, in particular, the HOA reserve funds.
What are HOA Reserve Funds?
The association’s reserve fund is its savings account. Compared to the operating fund that the association uses to cover repairs, maintenance, and other day-to-day expenses, the reserve fund is, as the name states, reserved for unplanned expenses. It’s the board of directors’ duty to save around 20 to 40 percent of the total HOA dues/fees to the reserve fund.
In general, HOA emergency funds are used for unforeseen and large-scale repairs of the association’s assets. Let’s say the floor of the association’s clubhouse will need to be replaced in fifteen years. Instead of adding $100,000 to the budget (which can be a burden on the homeowners due to the increase in dues), the HOA can collect smaller sums of money over several years. The funds will be stored in the reserve fund until they have to be used.
That’s why associations have to enlist the services of an association management company or property management company. This third-party property management service can evaluate when their assets will probably need to be repaired, allowing them to prepare for their reserve fund in advance.
Unfortunately, not all HOAs understand the importance of collecting this fund. As a result, they end up with insufficient funds in their accounts. When this happens, the HOA has to impose what’s called a “special assessment” that allows them to collect funds from each homeowner. Special assessments aren’t bad, but they can make homeowners skeptical.
What are HOA Reserve Funds Used For?
HOA Reserve Funds cover the cost of unplanned and planned repairs, replacements, and maintenance. The funds in the reserve can also cover the costs of renovations if the operating fund is insufficient. Below are a few examples of the expenses covered by the reserve fund:
- Large-scale landscaping upgrades
- Community-wide construction (e.g. community pool and playground)
- Costly planned repairs (e.g. replacing the roof of the fitness center)
- Costly unplanned repairs due to disasters (e.g. hurricane)
- Costly repairs of sidewalks, roads, and the like
These are several examples of the expenses the HOA would probably spend its reserve fund on. With that said, it’s the role of the board or the association management company to determine whether the reserve fund or the operating fund should be used.
Importance of HOA Reserve Funds
If you’re living in an HOA-regulated community, you might be wondering why you need to contribute to the HOA reserve funds. After all, membership fees should be sufficient, shouldn’t they? We’ll go through a few reasons why your homeowners’ association is collecting these fees:
#1 It Protects Property Values
One of the roles of the HOA is to preserve property values. It does this by making sure that the neighborhood’s aesthetics are taken care of at all times. In turn, this improves the values of all the properties – including yours. The HOA, however, can’t do it on their own, which is why they collect fees from the homeowners. Even if the funds won’t be used now, they will be used in due time. In other words, the association is already planning how it will preserve property values down the road.
#2 It Prevents Special Assessments
Special assessments aren’t unlawful, but they can be an annoyance to the homeowners. This is because no one wants to make a big one-time payment because of the board’s mistake. When the board of directors imposes a special assessment, chances are that they have run out of funds in their reserve and everywhere else. In addition, special assessments make homeowners skeptical regarding how the board is using their dues.
#3 It Keeps Membership Dues Low
Being able to dip into the reserve is more convenient than having to contribute more membership dues. Let’s say that the association never allocated funds for its reserve, however, it had to use all of its operating funds to cover the costs of unplanned repairs. By the end of the year, the association will be left with nothing. So, to recoup the costs, the board will collect a bigger fee from its members the following year. As you might imagine, the homeowners won’t be too happy about that.
#4 It Protects the Community in Case of Disaster
Natural disasters are unpredictable. That’s why the HOA board of directors should allocate a reserve fund in the event of disasters such as a flood or wildfire. When these events happen, the HOA will have properly allocated funds in its reserve to cover the costs of restoring the community to what it once was. Since the HOA’s responsibility is to protect property and people, having a reserve fund can help them do that.
How Much Should an HOA Have in Reserves?
Usually, HOAs hire an association or property management company to help them conduct a ‘reserve study’ to determine the proper amount to be put in the reserve. The reserve study looks at when repairs and replacements are likely needed. For instance, if the reserve study discovers that the pool will need to be repaired in five years, the board will be able to “spread out” the collection of fees over five years.
Can Homeowners Refuse to Pay Fees?
When a homeowner misses a payment, the HOA will tell them that they’re late on their dues and inform them of the repercussions. Typically, the HOA will collect a late fee with the dues that the homeowner owes.
If, however, the homeowner refuses to pay, the association can hire a property management company to collect the unpaid amount. The HOA can also sue the resident for refusing to pay the fees. Since the obligation to pay is included in the HOA’s Declaration of Covenants, Conditions, and Restrictions (CC&Rs), not paying would mean going against the association’s rules and regulations. Hence, don’t be surprised if the court gets involved when you refuse to contribute to the reserve funds.
Need more information on the different fees that the association can collect? A property management company can help you understand the fees, dues, and fines that you pay to your HOA per year. Contact Luxury Property Care today at (561) 944 – 2992 or complete our contact form to learn more.