Homeowners association (HOA) reserve funds often go underappreciated—until an emergency strikes. For many residents, contributions to reserves may seem like a frustrating expense with no immediate benefit. But for board members responsible for safeguarding the financial health of their communities, a well-funded reserve is not optional—it’s essential.
Unfortunately, an alarming number of associations are underfunded. Studies suggest that up to 70% of HOAs don’t have adequate reserves to cover anticipated future expenses. This leaves boards with limited and often unpopular options when a major repair or replacement is needed: levy special assessments, significantly raise dues, or borrow funds—sometimes at steep interest rates. These approaches may solve short-term cash flow problems but can create long-term consequences for homeowner trust and property values.
When reserves fall short, the financial burden often lands directly on homeowners, especially in the form of surprise assessments. Beyond the financial inconvenience, underfunding affects marketability. Buyers may view an undercapitalized HOA as a red flag, prompting them to negotiate lower home prices or avoid the community altogether.
Even more concerning is how underfunded reserves can limit financing options. For example, FHA loan approvals typically require that an HOA allocate at least 10% of its total budget to reserves. If your community doesn’t meet this benchmark, homeowners may find it harder to sell. The bar is even higher—20% reserve contribution—when less than half of the units are owner-occupied. Fannie Mae guidelines may also impose restrictions in these scenarios.
Underfunding doesn’t just affect residents and buyers. It impacts board decision-making. Deferred maintenance becomes routine, repair costs escalate, and long-term capital improvement plans fall by the wayside. Over time, this cycle undermines the association’s credibility and property values.
There’s no universal reserve target, but the goal is to cover the cost of future capital repairs and replacements not funded by the operating budget. A well-conducted reserve study is the most reliable tool for estimating what that number should be.
A reserve study will inventory all common elements—such as roofs, siding, parking lots, HVAC systems, elevators, and more—and estimate their useful life and replacement costs. From there, a funding model calculates how much the association should contribute each year to meet these obligations.
In addition to capital repair and replacement costs, boards should also factor in insurance deductibles and potential out-of-pocket expenses in the event of a catastrophic loss. For example, if your deductible is $100,000 and your co-insurance requires you to cover 20% of a $5 million loss, your reserve fund should be able to cover at least $1.1 million.
Completing a reserve study is not a one-time event. A major reason HOAs fall behind on funding is because they fail to regularly update their reserve studies. Property components age, costs rise, and community needs change—so your funding plan should evolve too.
Research shows that HOAs updating their reserve studies at least every five years are far less likely to impose special assessments. In fact, one study found that special assessments were 35% lower in communities that performed more frequent updates. Additionally, regular reviews lead to more consistent annual contributions, reducing financial shocks to the community.
What’s a Reasonable Contribution Rate?
While 10% of the annual budget is the minimum required by many lenders, most communities need to contribute between 15% and 40% of their operating budget to reserves to remain healthy. The national average is around 25%.
If your residents can't afford a 25% contribution rate, it’s unlikely they’ll be able to cover large special assessments either. This makes consistent funding not just a best practice—but a financial safeguard for all.
Here are a few key reminders for HOA boards looking to strengthen their reserve planning:
HOA board members have a fiduciary duty to make decisions in the best interest of the community. Underfunding reserves not only risks financial hardship but can be interpreted as a failure to uphold this legal responsibility. A proactive funding strategy protects the board from liability and the community from crisis.
Conclusion: Planning Ahead Pays Off
An HOA without a solid reserve fund is operating on borrowed time. When aging infrastructure and rising costs collide with inadequate reserves, the consequences ripple through every aspect of the community—from property values and homeowner trust to legal exposure and lender confidence.
Reserve funding isn't just a rainy-day measure. It's a core part of responsible community management. For many HOA boards, the best step forward is to bring in professional support to guide reserve planning, study updates, and long-term financial strategy.
If your board is ready to take a more proactive, transparent approach to reserve funding, consider partnering with an experienced management company. Gordon James Realty offers full-service HOA management, including reserve planning support, budget forecasting, and vendor coordination. Contact us today to protect your community’s future and strengthen its financial health.
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