HOA Reserve Question

I came across this question, regarding HOA reserves, on the Realty Times website – where they report Real Estate news and advice. I thought it might be a good tip for San Francisco buyers investing in complexes with an HOA.

The agent was trying to advise her client on,  ”what a good reserve balance should be for an HOA, and the best formula to use?”

Answer:The answer to that question is “There is no such formula”. To arrive at the answer requires performing a reserve study that identifies the HOA’s common element components that have a 1 to 30 year useful life. Each component is then measured, assessed for current condition, a useful life assigned to it and a current cost of repair or replacement given to it.

This information is then projected over a 30 year time frame along with the current inflation rate and rate of return on invested funds. The result is the amount of money that must be contributed each year by the owners to ensure that adequate funds are there when the various events come due. For example, if a roof has a 20 year life and a current replacement cost of $100,000, $5,000 should be reserved each year. The same process is used for all components. If reserves are funded each year following this example, they are 100% funded.

Since inflation, return on investment and cost of repairs and replacement are a moving target, this reserve study needs to be updated every year and a site inspection of the components is recommended at least every three years to keep the projections accurate.

That being said, a property that is financially sound tends to be in good repair and offers a higher quality of living, holds its market value, and protects the all-important curb appeal. In a buyer’s market with a high inventory of condo and townhomes, it’s the reserve fund that protects the homeowners’ investment, maintains property values and provides the peace-of-mind knowing that your HOA has a financial safety net in place.

 [Ask the HOA Expert]-Realty Times