Before you can understand what reserves are, you must first know how a homeowners/condominium association works. An association takes on the responsibility of maintaining the community with the primary objective of protecting property values. Achieving such a feat is impossible without proper funding. But, where does an homeowners/condominium association get its money?
Every association consists of members — homeowners who live in the community. These homeowners pay the homeowners/condominium association monthly dues, most of which go to the operating fund. The association uses this fund to pay for various day-to-day expenses such as landscaping costs, maintenance expenses, and management fees. So how much should an association have in reserves? A reserve fund is vital to any homeowners association because it acts as a safety net of sorts. When unexpected expenses come up, you can dip into your reserves to cover the cost. But, when an HOA has no reserves, you are typically left with two options: do a special assessment or get a loan.
The general rule of thumb is that the homeowners/condominium association put 60% – 80% of the future expense to maintain the common assets. How is that 60%-80% determined? A reserve study will tell you what assets need to be maintained, when and the estimated cost of the work. Could an association determine that on their own? Perhaps but its best left to the professionals to come up with accurate numbers for the work. In Washington State its a requirement for associations of 11 or more units to have a reserve study. Fannie Mae / Freddie Mac say associations with 5 or more units should have a study.
