With the recent financial crisis and the struggling economy property values across the state have declined greatly and delinquencies in HOA dues have increased. Some experts claim that the worst is behind us but there are still major issues that may cause property values to continue to decline. Many HOA’s are experiencing major financial problems as delinquency rates have skyrocketed due to foreclosed properties. In addition, in tough economic times when some homeowners are experiencing financial difficulties the first bill they stop paying is their HOA fees. As a result many HOA’s are trying to keep their dues as low as possible in these times. When operating costs continue to rise and HOA’s want to keep their dues low many associations reduce monthly contributions to reserve funds. This is a major problem because many HOA’s reserves are already inadequately funded. The main problem with having inadequately funded reserves it that it greatly increases the risk of deferred maintenance.
Deferred maintenance is defined as the practice of postponing maintenance activities such as repairs on property. When associations put off major repairs it can cause even greater problems that will end up causing additional costs to the association in the long run. An example of this is when an association decides to put off painting of their wood siding and trim. When wood is not properly protected from the elements it causes wood rot. The cost of replacing and painting wood siding and trim is many times more expensive than just painting it. In addition the added expense may now force the association to get a loan which will end up costing them even more in interest charges. Not only can deferred maintenance cause additional repair costs to an HOA but it will worsen the aesthetic appearance of the property and cause property values to decline.

The cycle of poor reserve funding, deferred maintenance, and declining property values is one of the worst problems an HOA can experience. So how do you avoid it? The first step is to make sure that you are aware of your future expenses and how much reserve funding will be necessary to defer these costs. The best way to do this is to have a reserve study performed by an independent professional and to update it on an annual basis. California Civil Code already requires that you do this and these days most lenders want to see a current reserve study before they lend to someone purchasing into an HOA. A reserve study not only tells you what your future expenses will be but also tells you your current percent funded. “Percent funded” is the ratio of what an association has set aside for reserves vs. the total depreciation of all their components (aka fully funded balance).   “Percent funded” is one of the most important numbers to look at when reviewing an association’s reserve study. The higher the percent funded the better off your association is. As the percent funded increases the risk of a special assessments and deferred maintenance decreases.

Many people ask what is the average percent funded for associations. The answer is that every association is different and we see associations in all situations from 0% funded to well over 100% funded. Some also have the misconception that associations must always be 100% funded. While it is ideal for associations to be 100% funded, with a current accurate reserve study associations can plan for future expenses using a cash flow funding plan and still be fiscally responsible at a level below 100% funded. In general it is thought that the following describes an association when it comes to percent funded: 0-30% Funded = Poorly Funded, 30-70% Funded = Fairly Funded, >70% Funded = Well Funded. The first thing lenders look at in a reserve study is the percent funded because they know the lower the percent funded the higher the risk of deferred maintenance, special assessments and declining property values. Typically lenders want to see an association above 60% funded.

Unfortunately the only way to increase your percent funded is to add money to your reserves or to replace or perform maintenance to your components. So unless an association wants to levy a special assessment it’s usually a gradual process to increase their percent funded.   Reserve study professionals can work with associations to develop funding plans so that they can strive to be a certain percent funded by a certain time period. The most important thing is to have a current accurate reserve study so you can make educated decisions on how much money to save to offset your future expenses and get your percent funded where you want it to be.