Reserve Funds: What They Mean For Your Condo Or HOA

A reserve fund sets aside liquid assets to cover major future expenses. While businesses and individuals can use them, reserve funds are most common in condo and homeowners associations. The use of reserve funds can be fairly specific and strict, since any spending needs to adhere to rules and regulations set forth by the association. For instance, the money may be used for repairs to common areas like a swimming pool.

Reserve funds are similar to cash reserves or emergency funds for your personal finances, the point being that the money is set aside to be used for maintenance or emergencies. Part of what you pay to your condo or homeowners association will go towards those instances.

Different types of entities that use reserve funds include:

• Businesses: In case of cash flow shortages, companies will dip into money reserves to see them through the short term. For instance, if a company is waiting on a large payment and it hasn’t come through in time to pay some bills, cash reserves will be used until the payment comes through.
• Governments: Governments have funds for when they need to cover fiscal emergencies.
• Financial institutions: Banks and credit unions need to have a minimum amount of cash set aside so that they can pay their customers who make withdrawals.
• Individuals: Think of cash reserves like emergency funds, for when unexpected emergencies arise.
• Real Estate Investors: Cash reserves are used in case of unit vacancies (when you still need to pay the mortgage and utilities), repairs and to pay property managers.

Condos and HOAs typically use their reserve funds to pay for community emergencies or large maintenance or renovation projects. They’re managed alongside operating expenses, which are used for a separate purpose. Funds are paid by condo or homeowners associations to pay for community expenses. There’s typically a community association board who will oversee these funds and oversee how it’ll be used. For instance, the board may decide to use some of the reserve funds to pay for the replacement of a few windows in a common building.

Reserve Funds Vs. Operating Funds

Reserve funds and operating funds are managed by the community board – in many cases, board members are voted in. While they’re typically managed together, operating funds are used for recurring or day-to-day costs, such as taxes, utilities and regular maintenance.

Reserve Fund Studies

A reserve study is where the community board or some outside professional does an analysis of the condo or HOA budget and how it’s used. There should also be a report which provides an estimate of what might need to be repaired, renovated or replaced within the next few years. The point of a reserve fund study is so that the community board has a better understanding of how money needs to be put aside in the reserve fund.

In general, reserve studies are done every 3 to 5 years. However, boards usually do one each year on their own, though it’s not as exhaustive. It’s usually to inspect how much it might cost to upkeep amenities and to see if adjustments need to be made to their budget. 

Homeowner Contributions

Homeowners contribute to reserve funds through their annual dues. In some cases, they may be separate from standard association fees if the board deems it necessary. If this happens, then the community will come up with a rationale as to why it’s necessary, provide plenty of notice and make sure that protocols adhere to guidelines.

Special Assessments

A special assessment may be necessary if a condo incurs an expense so large that the reserve funds can’t cover it. In that case, each member or condo owner will need to pay an extra fee, called an assessment, to cover the costs.

Reserve funds are good for homeowners in HOAs and condo associations because it allows the entire community to benefit from emergency repairs, large maintenance projects and other large expenses. Since this is an added expense on top of your mortgage, property taxes and maintenance fees, it’s important for prospective buyers to learn more about what to expect from buying a condo or any home in an association.