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Homeowners associations (HOAs) and condo/coop associations rely on reserve funds to maintain and repair shared common areas such as roofs, roads, driveways, stormwater management facilities, elevators, and a host of other expensive items to maintain and repair. When association does not have enough money in its reserve account to pay for needed repairs and doesn't get that money from somewhere, the consequences can be significant including decreased property values, deferred maintenance, and and even legal liability.
Options To Raise Money
There are three main options an association has to raise funds:
Special Assessment – A one-time fee imposed on homeowners to cover unexpected or unfunded expenses. These assessments can be costly, placing financial strain on residents who may not have budgeted for large, sudden expenses.
Drastic Increase in Regular Assessments – Significantly raising the monthly or annual dues paid by homeowners to quickly replenish reserves. While this can stabilize finances over time, it may be met with resistance from homeowners who prefer predictable costs and may not solve immediate needs.
Loan – An association can seek financing from a lender to cover major expenses. However, obtaining a loan may require demonstrating financial stability, and repaying it often results in increased assessments to cover interest and principal payments.
Consequences of Underfunded Reserves
Deferred Maintenance and Deteriorating Property Conditions
Without adequate reserves, necessary maintenance projects may be postponed or canceled altogether. This can lead to visible signs of neglect, such as cracked sidewalks, deteriorating roofs, or failing plumbing systems. When maintenance is deferred, repair costs often increase over time, making future fixes even more expensive.
Declining Property Values
A well-maintained community attracts buyers and retains property value. When an association cannot afford proper maintenance, the aesthetic and structural integrity of the community suffer. Prospective buyers may be deterred by the association’s financial instability, leading to lower home values for current residents.
Difficulty in Obtaining Loans or Insurance
Lenders and insurers assess an association’s financial health before offering loans or coverage. A poorly funded reserve account can make it difficult for an association to obtain financing for major projects or secure affordable insurance rates. In extreme cases, insurers may refuse to cover an association that is seen as a high financial risk. Moreover, potential buyers may run into issues with securing a loan to purchase a property in the association as a result of the underfunded reserves.
Legal and Fiduciary Risks
Board members of an HOA or condominium association have a fiduciary duty to maintain the financial health of the community. Failing to adequately fund reserves could lead to legal action from homeowners, state regulatory agencies, or even mortgage lenders who require stable financial reserves as a condition for loan approval in the community. Some states also have laws requiring minimum reserve funding levels, and failure to comply could result in penalties.
How to Prevent Reserve Fund Shortages
To avoid these issues, associations should:
Conduct regular reserve studies to assess long-term financial needs.
Implement a structured reserve funding plan based on professional recommendations.
Gradually increase reserve contributions to avoid large special assessments.
Educate homeowners about the importance of reserve funds to gain their support for necessary fee adjustments.
