While it usually isn’t recommended, there are some situations where dipping into the reserve fund is acceptable.
- Accessing an HOA’s reserve fund to cover operating expenses isn’t usually recommended
- There are emergency or unforeseen situations where you can do it
- Making smart decisions and conserving money when possible is essential
Generally speaking, you don’t want to use an HOA’s reserve funds to cover shortages in your operating budget. That money is put away for specific reasons, so using it to add to the HOA’s snow removal budget, for example, usually isn’t a good use of resources.
You may end up having to answer a lot of questions from homeowners if you use reserve funds for a non-essential reason, depleting available funds for significant repairs or renovations.
However, there are situations where it’s okay to tap into reserve funds. For instance, the COVID-19 pandemic left many people unemployed for months, and many associations experienced higher than normal assessment delinquencies. This put the short-term financial health of associations at risk.
Tapping into reserve funds in a situation like that helps offset a disruption to essential operating cash flow. We give an overview of when it’s acceptable to use an HOA’s reserve fund for operating expenses and how to go about it with caution and care.
What are reserve funds?
A reserve fund is cash that an HOA puts away for major projects, renovations, or emergencies. For example, someday, every home in the association will require new windows. As an active property manager, you can begin helping residents put money away for this expense so they don’t have to come up with the money all at once.
The amount you’ll ask homeowners to contribute depends on the property’s type, size, age, and tenants. Rehab and older properties require more maintenance, for example, and executive rentals have higher turnover with more opportunities for vacancies. Take the circumstances of the property into account before coming up with a fund number.
When to use the money
One of the most challenging parts of maintaining a reserve fund is deciding when to dip into it.
Regarding the pandemic, as we mentioned earlier, default rates were higher than usual, and it wasn’t a good time to ask residents for more money. However, that situation is highly uncommon, so when else is using this cash permissible?
You’ll have to make decisions on a case-by-case basis, but situations where using reserve funds may be acceptable include emergency repairs and maintenance, insurance, and risk management. Either way, there are three steps to keep in mind before making any decision:
- Step 1: Ensure you’re making the decision in good faith. From a legal standpoint, a decision made in good faith means you’re using the money for the right reasons without any malice or desire to defraud others. You may want to speak with a lawyer before you use reserve funds to confirm your decision meets this definition.
- Step 2: Make decisions in the association’s best interests. Taking money from the reserve fund to reduce your workload, for example, is not a good reason. The HOA as a whole must clearly benefit from using this money.
- Step 3: Do your due diligence before spending any funds. This step could involve meeting with a lawyer and inquiring about the situation. State laws vary, too, so seeking a local attorney is essential. Your lawyer will probably advise you to begin collecting financial documents, which will help you weigh your options and develop a solution.
Using cash from a reserve fund isn’t an easy decision to make, but you can give your property management firm and homeowners the best outcome by carefully going through these steps.
How to access the money
You can’t simply walk into a bank to withdraw cash from an HOA’s reserve fund. A property management firm likely won’t have direct access to this fund, so getting the money will require following some protocols.
There’s a good chance you’ll begin by taking your request to the HOA’s board of directors. From there, they’ll probably want to dig into the numbers to see if making these funds available is in the association’s best interests.
The board might also ask you to conserve cash in other ways before approving your request. For example, they might recommend limiting the purchase of new holiday décor for the association the following year to make up for the reserve funds you’re using for the operating budget.
Your HOA board will then use this information to make a final determination on whether your proposal is acceptable.
Managing risk for all homeowners in the association is the goal, and you don’t want to lose sight of that when dipping into the fund. For example, if a storm comes through and does some damage to common areas, you might be tempted to fix them up using reserve contributions. After all, these areas add to the HOA’s appeal, and homeowners love having access to them.
However, suppose you know that there’s a more significant issue requiring funds that will arise in the coming months, such as roofs coming due for replacement throughout the neighborhood.
In that case, you might be better off leaving the common area repairs for next year and focusing on the roofs. The reason is that roofs are essential for living and for insurance and risk management reasons, while the common areas are luxuries that can wait.
It all comes down to prioritizing what’s more important for the homeowners you’re serving, so carefully consider your options before making a decision.
Selecting the right contractors
Using reserve funds is a decision that shouldn’t be taken lightly, as they’re usually saved for major renovations, repairs, or emergencies. They should not be used to cover shortfalls in an operating budget in most cases, but there are exceptions. Carefully deliberating when to use them for operating shortfalls is necessary.
Whether you do decide to tap into an HOA’s reserve fund or you’re conducting regular maintenance and repairs, hiring trustworthy, vetted contractors to do a job is essential. Utilizing the wrong service providers could leave you in a challenging situation, especially if you’re trying to conserve money to make up for budget shortfalls.
VendorSmart can help you easily reach vetted, local contractors at a price your HOA can afford. Our team certifies all vendors ahead of time for full compliance, eliminating the guesswork on your end. Contact VendorSmart today to get started with your projects.