Scott Brady is co-owner and principal of Progressive Association Management, a CACM-member HOA management company serving 228 communities and nearly 15,000 homeowners throughout Southern California. Since founding the association management division in 2020, Scott has grown the company into the fastest organically growing association management firm in California by limiting manager workloads, providing full back-office support, and holding every team member accountable to documented daily service standards. |
When you pay your monthly dues, a portion covers the current operating expenses of the association, such as landscaping, electricity, water, and insurance. But if a board is doing its job correctly, another portion of those monthly assessments goes into a savings account for future repairs and replacements of common area assets. That savings account is called the “reserve fund.”
The association has no choice but to pay vendors and utilities every month, but they are not legally obligated to fund the reserves. In fact, only one state, Hawaii, mandates that boards fund their reserves to 50% of “fully funded.” So what does “fully funded” actually mean?
Understanding Reserve Fund Levels
Every year, the board must hire a qualified third party to analyze every common area asset the association is responsible for, as detailed in the governing documents and CC&Rs. These documents run with the land, meaning every owner in the association is bound by them and must contribute to the funding that protects those shared assets.
To be “fully funded” means the reserve account is 100% funded for all present and future repairs and improvements. This level is rarely achieved, and honestly, it is a bit of overkill to have that much owner money sitting in a savings account when most repairs and replacements are staggered over time.
On the other end of the spectrum, being 0% funded is financial foolishness. With no funds on hand for expected or unexpected expenses, the association would have to generate money through either a special assessment, which requires a majority vote of all owners, or an emergency assessment, which the board can approve without owner input. Either way, these assessments can be substantial and, if no payment plan is offered, due immediately in a lump sum.
What Happens When Reserves Run Dry
Here is a real-world example of what underfunding looks like in practice.
For a well-funded association where dues were increased in anticipation of major expenses, when the time comes to replace the roof, there is $1,000,000 in reserves ready to go. For an underfunded association with no money set aside and 35 owners, a $600,000 roof replacement means each owner may be on the hook for $17,000, due immediately.
If an owner cannot pay, the board can place a lien on their property to protect the balance owed. If the owner has no intention of selling and continues to ignore the obligation, the board can send the account to collections, which can ultimately lead to foreclosure. Although it may take a year or two to reach a forced sale, the legal costs along the way are the responsibility of the owner and can run into the thousands.
How Reserve Levels Affect Property Values
A savvy buyer will always review the reserve study and funding level before making an offer. If the reserve study shows that a roof designed to last 40 years is now 45 years old, replacement is expected to cost $2,000,000 in a community of 100 owners, and there is nothing in reserves to cover it, that buyer can reasonably assume a $20,000 assessment is coming. They will either ask for a price reduction of $20,000 or request a seller credit for the same amount.
Beyond the numbers, an association with chronically low reserves typically has not kept up with routine maintenance either. The community looks worn down and dated. There is a lack of curb appeal that affects how buyers perceive value and what they are willing to pay.
How Lenders View Reserve Health
Lenders pay close attention to the financial health of any HOA community they are considering lending in, and for good reason. If an association has less than 10% in reserves, Freddie Mac and Fannie Mae may refuse to lend there. These are the largest conventional lenders, the ones who allow buyers to put as little as 5% down and offer the most competitive rates. Without access to conventional financing, buyers are pushed toward “Alt Q” lenders who require 20% down and charge higher interest rates.
If the community also has active litigation tied to deferred maintenance and unpaid obligations, buyers may be required to pay cash entirely, shrinking the buyer pool even further and putting additional downward pressure on prices.
The Bottom Line
Reserve levels have a significant bearing on property values, and boards that take funding seriously are protecting the financial interests of every owner in the community. If you have questions about your association’s financial health or how it is being managed, we are here to help.
