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How Much Money Should an HOA Keep in Its Reserve Fund?

March 09, 2021 | Accounting

A reserve account is a savings fund that’s set aside by the association to meet future costs of upkeep and any unexpected costs that arise around the community. For these accounts, it’s important for boards to make sure they are adding or subtracting money from them periodically, or they risk the funds being escheated to the state if there has been inactivity for a period of time. In California, Boards are required to have two signers on the reserve account and any transfers over $10,000 also require two board members to authorize.

It’s also a good idea to keep a set amount of money in the reserve account at all times to cover the cost of unexpected repairs, emergencies, and replacements. Costs that are usually covered by reserve accounts include:

  • Roof replacement on common area buildings
  • New pump at the community pool
  • New playground equipment at association’s tot lot
  • Painting of common area buildings, such as the community clubhouse
  • Major landscaping projects
  • Construction and major renovations
  • Repairing streets or driveways

How much money should be kept in a reserve fund?

While the answer varies depending on the size of your association, HOA needs, and community, it’s usually a good idea to put between 25% and 40% of fees toward the reserve fund. Most HOAs are able to maintain a 70% funded reserve – and while not at full capacity, this amount allows the HOA to fulfill its duties and responsibilities without compromising any needed expenses within the community.

It’s important for every HOA to conduct a reserve study regularly so that the board has a better grasp of how much money should be allocated to the reserve fund. Reserve studies should be conducted every three years, as well as an annual inspection of the community’s amenities and an overall budget review.

A 100% funded reserve is ideal

HOA reserve funds are not only used as a means to pay for unexpected replacement and repair costs, but they are also used to renovate or upgrade a public area for the benefit of the entire community. This includes things like exterior painting, driveway sealing, and roof replacements.

These larger-scale projects are significantly more expensive than the usual daily operating costs of the community. Having a reserve fund allows the board to fund these expenses without having to raise association dues or resorting to special assessments. And with sufficient cash in the HOA reserve funds, the community will be able to account for unexpected expenses.

In these cases, it’s always better to be safe than sorry. When it comes to reserve funds, board members will be able to easily resolve any issues concerning the HOA. They can carry out necessary changes in a timely manner without burdening the homeowners with additional costs.

In general, an HOA’s accounts should be accessible by both the board and the managing agent. Most HOAs have a treasurer who has some expertise in financial matters, and some larger associations have an entire finance committee. Someone from the board should look at bills, monthly reports, and establish limits on payments. Additionally, regardless of how many accounts there are, there should be a system of checks and balances when it comes to making financial decisions.

If you’re looking for an experienced HOA management company to help you with your finances and accounting, APS Management can help. Take a look at our HOA management services or contact us for a consultation.