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SpinDistribute.com Article Directory

The following article was published in our article directory on September 11, 2012.
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HOA Reserve Funding: Are You Aware of the Rules?

Article Category: Real Estate

Author Name: Charles H. Maness, MSACC

Boards are already strained with increasing costs for basic services of utilities, insurance, and property maintenance/repairs. The need for reserve funding of 10% of the operating budget to be eligible for secondary financing sources like Fannie Mae, Freddie Mac, and FHA, is pushing the limits on what the owners of the associations can afford.

Reserve requirements have been steadily increasing from the secondary market financing. In addition to the 10% monthly commitment, the total reserves now must meet the needs of association for replacements of expected expenses. Most analysis will use a 5 year determination of the reserve balance in making the determination of adequate finding. As this can vary greatly and is subjective to location, materials, and labor costs, most underwriters are not using the $500 to $2500 per unit as a target to state adequate funding of reserves. Typically in Georgia, underwriters are targeting a mid-range of $1,000 per unit. Additionally, insurance deductibles from the master insurance policy is also required to be in the reserve account.

One major red flag to underwriters in general is the use of special assessments to fund projects. The lenders and secondary financing agencies are considering this as improper budget and reserve funding to meet the needs of the association. The underwriters will order a reserve study or new reserve study to be performed if the reserve funding is deemed inadequate or under funded.

Reserve studies are valuable tools for the Associations and the studies are often overlooked as such. The costs can vary from several hundred dollars to several thousand dollars depending on the size of the association, types of evaluations needed. At least, a general contactor or appraiser should determine the pricing of the replacements, an CPA or Attorney/Accountant firm should manage the review process of the reserve studies, and the broker should monitor and support the study for the association.

Reserve studies are not required by statute in Georgia; however, several states do require reserve studies at certain time intervals. It is best to review the relative statutes in your state and contact an attorney to see if your state is required to have and keep up a reserve study. Even if not required by statute, it is in the best interest of the Association to have a reserve study done every five years. Each Board of Directors have a duty to act in good faith for the association. In order to maintain this duty, the Board must exercise due diligence in assessing the needs of the association for current and future expenditures. The reserve study meet both those requirements.

Association management is a moving target in the wake of the recession and real estate bubble that decimated the condominium and homeowner association markets. In order to offer financing now and in the future for resales, a strong, proactive, and diligent Board must use best practices to maintain financing options. In doing so, having an effective management company and an active and diligent Board are the most beneficial steps in preventing future issues with financing guidelines.

Keywords: Atlanta HOA Manager, Atlanta HOA Management, Atlanta Asset Management, Atlanta Property Management, Atlanta Utility Billing, Atlanta COA Management, Atlanta Condo Management, Atlanta, Commercial Management, Atlanta Builder Services, Atlanta Real Estate Legal Services, Atlanta HOA Tax Services, Atlanta Self Management Services

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