How is the HOA’s reserve account? Does your HOA have enough in reserves so that you don’t have to worry too much about getting a special assessment?
When you live in or want to buy a condominium, townhouse, or other common interest development with Home Owner Association (HOA) dues, it’s important to double check the financial health of the community. If the account balances are not sufficiently funded, the risk is higher of negative consequences down the road.
Operating account and reserve account
HOAs have two types of financial accounts: one is for operating expenses (paying the gardeners, keeping up the complex, ongoing pest control work, etc.) and the other is the reserve account. The reserve account is a long term savings plan for major future repairs, replacement, or necessary upgrades.
For instance, the HOA reserves fund would be based on the projected future needs for things such as:
- repaving the driveways, parking areas
- resurfacing the pool periodically, replacing the pool heaters, and so on
- replacing common area features, if applicable, such as washing machines, dryers, water heaters
- Anything more than 1 year out for replacement
Periodically there will be a study done of how many more years major components likely have, such as the roof or pool, and what the board’s financial experts believe will be the cost to pay for those items when they will be required. This is the budget for future and major needs.
When these items are reviewed (every 3 years), a projection is made for what will be needed and what is projected to be the available funds at that time. When the study is done, the percentage of the reserve fund is stated.
The Balcony Inspection Bill
What about upcoming changes to the law that impact HOA obligations? As of January 1, 2025 any cantilevered balconies or raised walkways made of wood will have to be inspected in multi family home communities with 3 or more units (meaning that’s the deadline, not when they start to be done). This is due to the tragic accident in Berkeley where a balcony collapsed. California Deck Inspection has a page on this topic and I’ll quote this description on the requirement (do read the whole page if your complex has items as described here):
The inspections address structural integrity, flashings and waterproofing of these elements on buildings with three or more units and two or more stories in height. All initial inspections must be completed by January 1, 2025. Inspections will be performed on any external building element six feet above ground level including walkways, balconies, decks, landings, stairways and railings. On larger complexes, the law allows for 15% of the respective elements to be inspected as a representative sampling. (Quote from link above.)
If the flashing, waterproofing, and integrity are not right they will need to be fixed. All of this will cost money. Is it a line item in the reserve account?
What is the risk to a low percentage of funding in the reserve account? How high must the reserves be?
Most HOAs seem to be underfunded, meaning that they are not at 100% of what is needed. Some are just a little lower, but many are substantially lower.
The negative result of underfunded reserve or operating accounts can be deferred maintenance and the need for a special assessment later. Additionally, if the reserve account is extremely low, it can impact a home buyer’s ability to get the mortgage approved by a lender.
When the monthly operating account runs low, sometimes the board “borrows” from the reserve account, but unless there’s a plan to collect more and repay the reserve account, you can see how this can turn into a problem. Sometimes in the board minutes you will read that board members voted to do this to cover a short term problem.
Jacquie Berry, owner of Community Association Data Source, is our local expert in HOA documents and disclosure. In 2011, she spoke at the Los Gatos-Saratoga Association of Realtors Wednesday breakfast meeting and shared these statistics, which are a bit scary:
There are over 48,000 homeowner associations in California; CIDs make up a quarter of all housing in the state of California; 49 percent of CIDs are self-managed and less than 25 percent are 100 percent funded in their reserves.
To read more about her comments to the realty board (from 2011), please view the post on the Silicon Valley Association of Realtors blog: REALTORS® told HOA compliance is all about disclosure.
Recently Jacquie gave a session to Sereno agents virtually, and cited the same ratio today.
Thinking of buying a condo, townhouse, or property with an HOA? Note the condition of the complex when visiting the site. When funds are low, even normal operating expenses such as gardening or regular maintenance can be let go. That’s your first red flag of trouble.
Many home buyers do not want to read the hundreds of pages of HOA docs. As buyer or seller agents, the HOA docs are beyond our scope of responsibility and expertise. You can hire a professional, such as Jacquie Berry, to analyze those docs for you and to find the financial red flags or any missing paperwork (a missing disclosure). Her website is https://www.cadatasource.com.
I do recommend paying for professional guidance with the HOA documents. If you are going to review them alone, do make sure that you check out the reserve account and the rest of the disclosures to better protect yourself against raises in dues or “special assessments” later.
If you are currently a member of an HOA, keep a close eye on the financial health of the group by paying attention to the reserve account.