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Reserve Accounts

Started by ThomasL • 16 replies • 1810 views

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ThomasL (Pennsylvania)
Posts: 16
Posted:
What would be considered a fair amount to have in reserves. Our HOA is responsible for the repairs to our underground water lines. They are going on 30 years and starting to break and leak. We only have 83,000 in CD reserves We have an operating budget of 375,000.00. Whats the rule as far as enough in them and to stop adding to them.
GlenL (Ohio)
Posts: 5,491
Posted:
There is no "magic" number as each HOA is unique. You should have a reserve study done which will figure out what you have and how long it should last. You then add a percentage to allow for inflation and divide the amount you need by the number of years you have to acquire it. The reserve study should be updated every 3-4 years.
Google "HOA Reserve Study" to find firms all across the country or contact your local CAI to find a firm near you.
Studies show that 5 out of 4 people have problems with fractions
ThomasL (Pennsylvania)
Posts: 16
Posted:
Thank you for the info and the link to follow. I was just hoping that someone could give me an idea if we should freese the amount going into reserve acct. or build it up we fund these reserves by the net income at the end of the year.
GlenL (Ohio)
Posts: 5,491
Posted:
I certainly wouldn't freeze it. From the sound of your original post I would assume you will need to spend the majority of your reserves to replace the water lines, hopefully without having to have a special assessment. Then you will need to start building the reserves back up for the next time.
Studies show that 5 out of 4 people have problems with fractions
SusanW1 (Michigan)
Posts: 5,202
Posted:
Thomas - our subdivision's water lines were installed in the 20's! The pipes are - believce it or not - still in good shape, except at the junction boxes (15 of them) throughout the sub.

We take out $20,000 every year to repair/replace the junction boxes and for any other little leaks. When they get near or in canals, it can really get expensive to repair.

We don't have a replacment figure in the Reserves for the entire water system. If it "blows" then we will have to get water from the township. That would entail a huge expenditure on each home.

Our artisian wells provice for 250 homes and an additional 30 homes outside the sub.
BruceF1 (Connecticut)
Posts: 2,535
Posted:
Thomas,

Yes, there is sort of a "magic number" when it comes to reserves. FHA, Fannie Mae and Freddie Mac like to see 10% of the association's annual budget go into reserves unless a reserve study has been done showing that a smaller amount is sufficient to meet future needs (repairs, replacements). Lenders may refuse to write mortgages for folks intending to purchase property in the community if they believe an association's reserves are inadequate.

As to funds remaining after the end of the year, some states require that the excess be returned to the homeowners, either directly by check, or in the form of a reduction in the following year's assessments. Some states may allow the excess to be transferred to a reserve account. Also, the excess may be taxable, depending on circumstances.
SusanW1 (Michigan)
Posts: 5,202
Posted:
Thomas - IMHO, a water sysem (tanks, pipes, junction stations, generators, etc) within a subdivisin is not a "reserve" item.

Why? because you cannot acertain the "life" of the system.

What would be the replacement cost of the ENTIRE system? For us, we figured it would be in the millions of dollars.

We must fill out exhaustive paperwork with the state and have a licensed water inspector overseeing the entire operation. Thank goodness we have one on the board.

So we just set a certain amount every year to do upgrades (in stages)

It does take a plan of action to do that. Your water committee can flag URGENT and PLANNED steps of action and get costs associated with that. Use regular amounts each year for this kind of on-going project.

And yes, that is taken out of the Reserves every year.

SteveM9 (Massachusetts)
Posts: 3,699
Posted:
Quote:
Posted By SusanW1 on 01/12/2012 8:18 AM
a water sysem (tanks, pipes, junction stations, generators, etc) within a subdivisin is not a "reserve" item. Why? because you cannot acertain the "life" of the system. What would be the replacement cost of the ENTIRE system? For us, we figured it would be in the millions of dollars.


There is no reason you cant do a reserve study on a water system. A tank has a lifespan. A motor has a lifespan, etc, etc. Each major item can easily be estimated.

How long do the motors typically last?
How long have we had it?
How long do we have to go?
How much is a new one?

If your just replacing things as they break with no idea how much each item costs or when it may break, and no idea what to charge for dues, you have a dysfunctional HOA and need to take steps to fix your process.
JohnC46 (South Carolina)
Posts: 14,265
Posted:
I was once told that a typical Capital Reserve should be equalivient to 6 months dues from each unit. Would this amount fit/work for your situation? Yes or no, please feel free to comment.

Thanks

ShirleyC (California)
Posts: 117
Posted:
I thought reserve funds had to be designated to a project.......i.e.) pool resurface......$5000.00....life 5 years.....hence $1000 per year.....I don't see how you can just say well we need 10% of the annual budget........and then spend it on what the board feels like spending it on.

SteveM9 (Massachusetts)
Posts: 3,699
Posted:
Quote:
I was once told that a typical Capital Reserve should be equalivient to 6 months dues from each unit.


6 months is just a wild guess. It may or may not be enough to pay for what your HOA needs. Every HOA has different assets so there is no "good" figure.
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Quote:
Posted By SteveM9 on 01/18/2012 4:29 PM
I was once told that a typical Capital Reserve should be equalivient to 6 months dues from each unit.


6 months is just a wild guess. It may or may not be enough to pay for what your HOA needs. Every HOA has different assets so there is no "good" figure.

Steve

While I realize there is no hard number, would the 6 months per unit sitting in your Capital Reserve work for your HOA? If no, please give an idea of what would work for your association.

Thanks
SteveM9 (Massachusetts)
Posts: 3,699
Posted:
Quote:
would the 6 months per unit sitting in your Capital Reserve work for your HOA?


No

Quote:
If no, please give an idea of what would work for your association.


What would work for my association is not what would work for your association so there is no need to get into details.

What does work is a competent reserve study that is updated annually. This shows what is going to need to be replaces, when it needs to be replaced, how much it will cost and how much you need to set your dues at to meet this cost.

Its a methodical way to budget to know what you need, vs just making up a number and crossing your fingers you are correct.
ThomasL (Pennsylvania)
Posts: 16
Posted:
We do earmark our reserve accounts. I only wanted to get feed back on what other HOA's use for basing how much to have in reserves. Our HOA is responsible for all the water & sewer lines in our developemnt and they are getting pretty old(30 years) and several times a year we have breaks that have to be repaired. The original developer made sure he put it in our documents that we are responsible for repairs and replacements to the water and sewer system. Since then he is no longer involved with our HOA and sold the water company on the property to a municiple water authority and all the wording in our documents carried over to them. Not a bad deal for them....Charge us for water and sewer quarterly(same rate as outside of the developement) and we must maintain the water & sewer lines Legal?
FrankM7 (Pennsylvania)
Posts: 61
Posted:
TomasL, the only way to estimate the amount of funding which should be in your reserve account is to do a reserve study to estimate all the repair and replacement expenses you expect at future dates, calculate the number of years until the expenses are needed, figure in the amount already in the account, and divide the numbers by the number of residents paying dues and by the number of years until each one occurs.

PA does not require a reserve study like some other states, but it is the only way to get a good handle on the amounts needed. I can help you with it if you want.
JacquelineB2 (Florida)
Posts: 50
Posted:
My HOA is in somewhat the same position, capital expenditures that we haven't and won't have the monies for. Apparently as a marketing tool to bring in buyers for the new homes, these large expenditures were added to the bylaws. Now we are being sued by a homeowner who feels she needs a new roof, problem is she lives in one or our quadruplexes (4 roofs to be replaced) so I would get with the Department of State for you State and look up "article amendments", it will tell you the forms and the cost of doing the amendments to be revised. Hope this helps!

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