Don’t Allow Your HOA to Ignore Financial Needs and Operate Without Proper Reserves

Studies show that there are a growing number of homeowners associations that ignore reserve funding requirements and as a result, fail to maintain the required level of reserve funds to properly maintain, repair, and replace common areas within the common interest community that the association is responsible for. Such a practice is a violation of the responsibilities of the board members who make the decisions for the association and will ultimately have considerable negative effects on the association.

Inadequate reserves are typically a result of several different causes, but in most instances the problem can be traced to poor decision making on the part of those who are responsible for the preparation of the association’s annual budget. Maintaining a realistic budget each year is critical to the financial success of a homeowners association. An unrealistic budget will ultimately lead to improper use and depletion of necessary reserve funds, deterioration of property that is not properly maintained, unexpected needs for special assessments on homeowners, conflicts among homeowners and board members, and a decline in the desirability and value of the property that is in the affected development.

Unfortunately, the failure to maintain proper reserves has been, and will continue to be severely impacted by financial downturns that are suffered by the association members who are responsible for payment of the assessments that are the source of the funds that are required to operate the association and maintain proper reserves. It is a common practice for homeowners who are in financial distress to stop making their payments of their share of the assessments that are due to the association. The problem becomes compounded by bankruptcies and foreclosures and the homeowner’s failure to maintain their property. This results in not only a loss of the assessment income, but it also imposes a burden on the association to incur additional significant expenses for attorneys and other costs that are related to enforcement actions against the homeowners. In the end, the association finds itself in the position of having an underfunded budget and not having the funds that are necessary to pay the ongoing expenses.

Proper planning on the part of the association’s board of directors coupled with proactive involvement by homeowners is critical to the successful handling of insufficient revenue that is needed to pay ongoing expenses and maintain reserves. The signs of an association’s failing financial health are apparent and should not be ignored. Homeowners should make sure their board of directors provides them with the required annual financial reports for their association and take the time to actually review and digest the information that is provided. Homeowners must also react to indications that their homeowners association is in financial distress.

Ultimately, the homeowners acting collectively have the power that controls their homeowners association. By being aware of what is happening in their association and taking the time to participate and contribute to their association and the election of responsible directors who are committed to the association fulfilling its responsibilities concerning reserve studies, budgets, and assessments, the impact of periodic cash flow problems that result from unexpected occurrences can be minimized and overcome.