How much should an HOA have in reserves? The reserve fund plays an important role in the financial well-being of a homeowners association. However, far too many HOA boards don’t know the first thing about funding their reserves or how much to contribute every year to meet the needs of their community.

 

What is an HOA Reserve Fund?

A reserve fund is a savings account allocated for future financial needs, primarily the cost of major repairs and replacements. Due to its purpose, this fund should be highly liquid. This means that the HOA board should be able to convert the funds into cash and withdraw them at a moment’s notice.

Examples of uses for the HOA reserve fund include:

  • Significant landscaping renovations
  • Installation of new playground equipment or development of a neighborhood park
  • Replacement of a community pool pump
  • Roof replacements on common area buildings
  • Refinishing of clubhouses and other structures associated with the community
  • Costs associated with replacing fences in HOA-managed areas
  • Other substantial construction or renovation projects

 

How Much Should an HOA Have in Reserves?

Generally, the rule of thumb is that an HOA’s reserves should be at least 70% funded. Of course, the ideal would be for an HOA’s reserves to be 100% fully funded, but this is not always feasible for associations. As such, the HOA board should aim for at least 70%.

How much should an HOA have in reserves exactly?

No dollar amount universally applies to all HOAs when it comes to reserves. Each association is unique and has different needs. Therefore, boards should evaluate their financial health, level of funding, and needs before determining the appropriate funding amount.

 

The Role of the Reserve Study

A reserve study is a key financial tool that will help HOAs determine the right level of funding. This study consists of the following information:

  • A summary detailing the number of units in the association, a physical description, and the reserve fund’s financial status.
  • A 20-year projection including the starting reserve balance, suggested contributions, expected expenses, and anticipated ending balance.
  • Explain the methods and goals used to calculate the fund status and create the funding plan.
  • A table listing the inventory of components, quantities or descriptions, their useful life, remaining lifespan, and current replacement costs.
  • The sources used to determine cost estimates for component repairs or replacements.
  • A description of the service level applied in preparing the reserve study.
  • The fiscal year for which the reserve study applies.

 

How are Reserve Funds Calculated?

To determine the amount needed in reserves, the board should start by identifying all major future repairs and replacements the HOA may require. Then, it should assess each item’s remaining useful life and estimate the costs for repair, replacement, or maintenance. The total cost should be divided by the remaining years of usefulness to calculate the annual amount needed.

For instance, if gym equipment needs replacement in 10 years for $12,000, the HOA will need to save $1,200 annually or $100 monthly. Then, divide the monthly amount by the number of community members to find individual contributions.

However, remember that HOAs often need to prepare for multiple major expenses simultaneously. In addition to gym equipment, an HOA may need to save for other significant repairs or replacements, which will likely require higher monthly contributions.

This is the simplest way to calculate reserve fund requirements. However, most boards lack the expertise necessary to estimate the remaining useful life and the cost to repair or replace each component. As such, a reserve study is essential to determine all of these variables and devise a feasible funding plan.

 

Is an HOA Reserve Fund Required in Texas?

Is an HOA Reserve Fund Required in Texas?

According to Section 204.010 of the Texas Property Code, the HOA board may adopt and amend reserve budgets unless the governing documents say otherwise. A similar provision exists under Section 82.102, which applies to condominium associations in Texas.

However, no Texas HOA reserve fund laws require associations to maintain a reserve fund. As such, many associations in the Lone Star State have either poorly funded reserves or don’t fund reserves at all.

Even without a statutory requirement, HOAs and condo associations in Texas would be wise to start funding reserves. The reserve fund covers major repairs and replacements in the future. Without it, an association would need to levy hefty special assessments or raise dues by an exorbitant amount in the event of a major component’s deterioration.

As for other Texas HOA reserve fund requirements, they are as follows:

  • According to Section 82.112, which applies to condominiums, an association may not use its reserves to pay operating expenses until the termination of declarant control.
  • According to Section 82.157, which applies to condominiums, resale statements must include the reserve amount (if any).

While there is no Texas law that requires associations to fund reserves, boards should still check their governing documents—some HOA governing documents mandate reserve funds regardless of the lack of a statutory requirement.

 

Is an HOA Reserve Study Required in Texas?

No, Texas law does not require homeowners associations or condominiums to conduct a reserve study. Other states have such requirements, but the Lone Star State is not one of them.

Although there is no statutory requirement to conduct a reserve study, associations should still consider implementing it. A reserve study can be a very useful tool for ensuring the financial health of the HOA or condo for years to come.

Keep in mind that reserve studies, especially the comprehensive ones, can be quite expensive. However, subsequent updates to the initial research tend to be more affordable.

While no Texas law requires associations to conduct a reserve study, boards should still check their governing documents. Some HOA governing documents mandate reserve studies or financial reviews, at the very least, regardless of the lack of a statutory requirement.

 

How Much Should an HOA Have in Reserves? Answered!

In Texas, no law requires homeowners associations to fund reserves. However, board members should refer to their governing documents for guidance. Some CC&Rs and bylaws require reserve funding and even a reserve study every few years.

Graham Management offers exceptional HOA management services, including reserve fund planning, to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more.