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The funding levels of your reserves can affect property values and the ability of homeowners to obtain mortgages.  While looking at the percentage funded can be a quick way of assessing the reserves, it can also be misleading.  The association may be funded 100% and still face difficulties due to unforeseen projects.

On the other hand, the association might be 70% funded and efficiently handle expenses throughout the year.  Before answering the question of what percentage funding is ideal, consider the following for dealing with unexpected projects without depleting the reserves.

 

Even without a vote from members, the HOA board can legally increase an assessment by 20 percent.  Likewise, the board is allowed by law to raise a special assessment up to 5 percent without having a vote.  The homeowner association website could be very useful for notifying all members about the increment.

 

There are two ways of borrowing that an HOA can rely on.  The funds may be borrowed from the reserves or ask for a loan.  If you decide to take money from the reserves, you need a popular vote by the board members and a repayment plan must be in place to replenish the reserves.  Borrowing money from the reserves is usually done for small projects while taking out a loan is done for extensive projects.

Most homeowners associations want to have their reserve funding at 100 percent.  However, achieving that is quite a challenge and HOA’s have to enforce special assessments on members.  Often, this leads to complaints on the homeowner association website and other platforms.

In order to keep your reserves at a healthy level and not put a huge burden on homeowners, set a minimum figure that you must hit; 70 percent would be a good start.  From there, track the cash flow in and out of the reserves meticulously, using fair assessment increments when necessary to avoid depleting the reserves!