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How does HOA calculate reserve needs? Is there a formula?

Posted on Fri, Feb 11, 2011 @ 07:55 AM
How do you calculate the amount the HOA needs to have in reserve? We are a relatively new building with 8 units and when we bought our condo our HOA fees included a management company. All of us decided to self manage, but the board wanted to keep our HOA fees the same so we could build up our reserves. We all agreed to this, but over a year has gone by and we are still paying the same HOA fees. I believe we should have a healthy reserve for our safety and for re-sale purposes, but not too much that we pay for future owners issues. Is there a formula to know what is a healthy reserve amount?



National Reserve Study Standards, introduced in 1998, clearly articulate a way to measure Reserves. Called Percent Funded, it is a measure of current Reserve cash (as of the 1st day of the Fiscal year) to the Fully Funded Balance, which is the deteriorated value of your Reserve Components (again, as of the first day of the fiscal year).  
See more atwww.ReserveStudy.com.  
Bottom line is 0-30% range is weak, where special assessments and deferred maintenance are common. Strong is 70-130%, where such Reserve cash flow problems are rare. 
Make contributions sufficient to put your Percent Funded rating in the right range. 
Want to avoid figuring it out with a spreadsheet? Create a free account for your association atwww.QuickReserves.com, the online Reserve Study tool. Everything there is calculated and presented according to National Reserve Study Standards. 
Good luck!

posted @ Friday, February 11, 2011 8:09 AM by Robert M. Nordlund, P.E., R.S.

Mr. Nordlund being a professional Engineer is dead on. You can have a Reserve Study done by a PE or Reserve specialist or you can take the time and effort to contact each trade professional to come out a give you free replacement estimates. I prefer the P.E. 
I would recommend to do a simple spreadsheet based on the Reserve Study, in this manner you can simply plug in future figures and let the program calculate your future financial needs. It is a very handy tool to help with your Budget process. 
Another method is to use a Management Company, they have many contacts and resources to help a Board. Self-management may be your preference but I can almost guarantee that you will not know all the State requirements for running a Board and complying with State laws and your own documents. 
Finally, by NOT considering the future needs of future owners, you will find that re-sale of your units many be difficult; additionally, many reserve items are long term items, such as roof replacement, painting, paving...etc. If you don't fund these, you're simply asking for trouble and may not be in compliance with your State laws. For example, Florida has very specific laws regarding budgets and reserves. A one year funding of reserves in Nothing compared to what you'll need. 
Please be careful. 
I'm not a lawyer or CPA or PE.

posted @ Friday, February 11, 2011 10:23 AM by cebo

There are actually two questions to be answered: how do you calculate what is needed in reserves AND how do you decide how much to contribute to reserves once you know how much is needed. 
Yours seems to be a fairly new HOA, correct? If so, did you not receive a copy of the reserve study that the developer should have had prepared for the initial series of purchasers? Locating the initial reserve study would be a great starting point in determining how much you need to contribute each month.  
In terms of your HOA fees remaining unchanged, all of you need to understand what you are spending on operating expenses versus how much do you contribute to the reserve account. I get the impression from your tone that the funds might be co-mingled. Check it out to everyone's satisfaction.

posted @ Friday, February 11, 2011 2:16 PM by Larry Davis

Larry is correct; as far as we can tell, unless you have "pooled" you resources you need to fulfill all the expenses, operating budget as well as reserves.

posted @ Friday, February 11, 2011 5:11 PM by cebo

Can you explain what you mean by "...Fully  
which is the deteriorated value of  
your Reserve Components (again, as  
of the first day of the fiscal year). What does 
Deteriorated Value mean (depreciated?) 
and what are Reserve Components? Examples would  
really help. Thank you.

posted @ Sunday, July 06, 2014 6:39 PM by sarah bang

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