When you enter escrow to purchase a condo you receive hundreds of pages of HOA documents.  These documents contain things like, CC & R’s, Bylaws, and HOA Budget.  One of the most important documents to review is the reserve study.  The reserve study tells the prospective buyer if the association has saved enough money to pay for its future common area repairs and replacements.  This includes things like painting the buildings and replacing roofs.  The most important number to look at is the percent funded.   The ideal situation would be for an association to be 100% funded.  On average most associations are somewhere around 60% funded.

In general the following describes an association’s reserve strength:

0-30% = Poorly Funded

30-70% = Fairly Funded

>70% = Well Funded

The lower the percent funded the higher the risk of a future special assessment.   A low percent funded may also lead to deferred maintenance which can hurt property values.

Another important thing to look at in the reserve study is the funding plans

Most reserve studies should have a projection of what the percent funded will be in the future if the association follows their current reserve funding plan.  Most studies will also have a recommend funding plan.  If the current funding plan is less than the recommend funding plan and the percent funded is projected to reach levels below 30% the buyer may be faced with future dues increases or special assessments.  If the study is more than a year old the buyer should also review the associations financials and budget to see if numbers have changed since the study was performed.

In California all HOA annual budgets must include an Assessment and Reserve Funding Disclosure Summary.  This document should be included in the HOA Escrow Documents.  This document summarizes the findings of the reserve study into a one page document.   Item 3 requires the HOA to answer yes or no if their current funding plan will provide enough funds to pay for expenses over the next 30 years.  If the answer to item 3 is no then item 4 must disclose what additional assessments or contributions will be needed to ensure sufficient reserve funds.

If an HOA is has underfunded reserves the buyer may want to request that the seller credits them with funds to make up for the deficit.