Update 10-15-2014: A Reserve Study reveals an analysis of the current and forecasts the balance of the Reserve Fund and develops a plan to make repairs and/or replacements of common elements (i.e., pool, tennis, clubhouse, tools, supplies, equipment, etc.,) and an equitable method to distribute costs of those repairs/replacements to HOA members.
If there is a Homeowner’s Association (HOA) for a property you plan to purchase, there normally will be monthly/annual dues you will pay in addition to your mortgage. Be sure you inspect the financial stability of the HOA’s budget and its reserve fund. In this economy, many homeowners are refusing to pay their homeowner’s dues.
Every HOA has costs. In addition to the front subdivision entrance area and monument, if there are facilities like a pool, tennis court(s), clubhouse, playground, etc, there are costs to insure and maintain them. The standard approach is to collect monthly/annual dues from homeowners to pay for all these and other necessary expenditures. A portion of your HOA fees/dues may be in excess of current planned annual expenses and placed in the bank as “reserve funds” to be used for major or unexpected repair and replacement of facilities/amenities.
If the HOA does not have enough funds to pay for the extras like relining the pool, resurfacing the tennis court, or re-roofing the clubhouse (which all could cost several thousands more than normal expenditures), then depending on the HOA CCR’s (Conditions, Covenants, and Restrictions – i.e., HOA rules/regulations) the HOA needs to get the funds one of two ways:
(a) PAY NOW – Charge each house in subdivision a flat one-time fee (i.e., special assessment) to cover their share of expenses, or
(b) PAY LATER – Increase the annual HOA fee by an amount equal to finance the expenditure over a period of time.
Underwriters of many condominium loans (FHA, Fannie Mae, and Freddie Mac) may require a reserve study and proof that at least a minimum percentage of the annual budget is placed in reserve or may not get financing for the HOA expenditures.
The HOA can have a reserve study performed by a qualified reserve study provider. Members of Association of Professional Reserve Analysts.
Note: Special assessments are the results of poor planning
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