how-to-manage-reserves-in-a-crisis_thumbnail.jpgDesignated money set aside for future expenses, such as repairs or replacements on buildings that are older than what's considered "normal wear-and tear”, are called reserve funds. HOA reserve funds are important to have set in order to prevent unexpected financial burdens on individual homeowners.

So, what is considered a good reserve fund?

Reserve funds that are funded at 70-100% is considered good. Your HOA reserves should be funded as close to 100% of their "ideal funding level" so that you can avoid a special assessment. The ideal funding level represents the funds an association has stored for when components need replacing and will vary depending on how far away from this figure your community is at any given time. Reserves funded at 70% or more is considered safe and not in danger of a special assessment; however, reserves funded at 30% or less requires immense effort just in terms of making up differences and a special assessment will almost certainly be needed.
In our recent HOA budget survey, 72% of board members indicated that they weren’t confident in operating funds or in the returns they were getting on their reserve funds. HOA reserve funds are extremely important, and to help, we’ve outlined six ways to get the most out of your reserve funds (including one you likely haven’t even heard of).

1. Only invest in money market accounts and CDs. 

Your responsibility as a board member is to protect the assets of your association. That means only investing in FDIC-insured money market accounts and CDs, avoiding risky investment vehicles like mutual funds or bonds altogether. Even without intent to do harm, some boards choose risky investment vehicles, which can lead to consequences. For instance, if one of those investments falters, you may not have the necessary reserve funds to complete a planned maintenance project. 

Additionally, if a board member invests in a risky vehicle, there may be legal consequences. If reserves are invested improperly, a resident could sue the board for breaching their fiduciary duty and putting the funds of the community at risk. By solely investing in FDIC-insured money market accounts and CDs, you protect your association and community.

What is the biggest (and common) reserve blunder? Watch a quick video clip below to hear what Kirk Kowieski, vice president at FirstService Residential, said.


2. Trust HOA professionals for investment advice. 

It is important for boards to have a full understanding and insight into their community's finances and reserve funds. HOA boards should look to their community management company and financial services provider to help make sound investing decisions. Some boards research investment information themselves via the internet or financial publications, which is time that may be better spent creating better HOA policies. 

Karla Chung, vice president of FirstService Financial, FirstService Residential’s financial partner, said, “The problem we see is when board members take on too much themselves. They may perform hours of research, drive from bank to bank to scout out the best rates or compare their personal portfolio to that of the association without realizing that financial institutions treat consumer accounts differently than business accounts.” She added, “This can also lead to lower returns on investments because board members may not have the experience or extensive portfolio to leverage more competitive rates.”

3. Learn HOA investment fundamentals.

While board members should avoid overstepping their roles or taking on too many responsibilities when it comes to reserve fund investments, they should have a basic understanding of HOA financials. Along with understanding your responsibility as a fiduciary, it’s important to be informed about HOA investments and your financial obligations. Even if you are working with a financial services company, make sure your association is choosing safe and time-tested investments (e.g., money market accounts for liquid funds and CDs for long-term investments). Additionally, your association should also be following state legislation in terms of individual requirements for managing and reviewing reserve funds. 

4. Work with an HOA-specific financial services company. 

As a board member, you may not have the resources or bandwidth to truly maximize your financials. That’s why it's especially important for HOA investors who want maximum return on their investment dollars and an association with strong financial practices to work closely alongside an HOA financial services company. They should be equipped with large portfolios and established relationships between banks, allowing them access to competitive rates while understanding how increasing returns can positively impact the goals and long-term health of your association.

For example, FirstService Financial is able to leverage its existing relationships with more than 30 banks in order to provide FirstService Residential clients with higher rates on money market accounts. On average, FirstService Residential clients earn rates that are 4 to 5 times higher than the national average.  

A solid financial services company will also help your association choose the right bank and a vehicle that offers safety, liquidity and return to ensure your association’s short- and long-term stability. For more information on how to choose the right banking program for your association, visit FirstService Financial.

5. Review your HOA investments regularly.

Board members should be reviewing their association’s financials on a regular basis. But did you know that reviewing reserve fund investments is equally important? This is particularly true if you are not working with a management company that has existing relationships with banks. Bank providers may offer teaser rates to customers, but these will go away over time so it’s important for you and your fellow board members to check in quarterly just make sure nothing changed significantly since last review!

Additionally, if you have an HOA Investment Policy (see below), you should be reviewing it on an annual basis as well. Partner with your management company and financial services company to ensure that you do not need to make any amendments based on changes to your financials. 

6. Create an Investment Policy. 

Last but certainly not least, having an Investment Policy that outlives the current board is critical. According to Chung, “An Investment Policy guides and protects the association and board directors for years to come.”

She said, “You may currently have an experienced and responsible board who is doing their fiduciary duty, but due to board turnover that may not always be the case. An Investment Policy is critical in providing continuity of prudent investment decisions that safeguard the association’s assets.”

An Investment Policy defines how and where an association should be investing its funds to maximize on the yield and ensure liquidity without compromising the safety of the funds. This is critical for ensuring that your community financials remain relevant well into the future. An HOA financial services company can help facilitate this process by walking you through each step and making recommendations to help you develop an effective plan for the future. 

Additionally, if you’re a homeowner in an HOA, it’s important to be familiar with the concept of reserve funds. HOA boards set this is money set aside specifically for future repairs or replacements on community reserves. By having this money available, HOAs can avoid unexpected financial burdens on homeowners.

Disclaimer: This article is provided for information purposes only and does not constitute legal advice.
Wednesday November 02, 2022