Beware low HOA reserve accounts
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Low HOA reserve accounts are surprisingly common, and when I asked the HOA expert, Jacquie Berry, about my observation, she said that 75% of HOAs in California have underfunded reserve accounts. This is a big deal for many home buyers, particularly first time buyers and seniors downsizing to a common interest development after living in a house without an HOA.
What is a reserve account?
Homeowners Associations have two budgets and bank accounts: one for operating expenses (right now items, this year) and one for long term costs (anything more than a year out).
To ascertain how much should be in that reserve fund, the person doing the budget estimates the replacement cost of the item, such as the roof, in today’s dollars and then factors in the rate of inflation, often about 3% per year and calculates the total cost needed in whatever year the replacement is expected to happen.
Why are so many HOA reserve accounts underfunded?
I asked Jacquie this question: why are all of these homeowners associations so poorly funded? She replied that many of them won’t save today for something needed in the distant future (with the underlying thought being “when I may not even live here anymore”.) It appears to be a common practice, at least in some homeowners associations, to simply kick the can down the road.
What’s the risk with a low HOA reserve account?
The risk with low HOA reserve accounts is multifaceted. We’ll touch on a few of them here.
Naturally, one of the first risks is the HOA insisting that home owners pay more. They are allowed to raise the monthly dues by as much as 20% of the previous year’s fee annually. Sometimes, though, that’s not enough. The next approach, when a large sum is needed, it to have a special assessment.
Special assessments get voted in when a majority of the HOA wants to get certain important projects done and there are not sufficient funds for the project. Recently we’ve seen these special assessments get levied for $30,000 – $50,000 or more in some cases. But that’s not all!
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