C Barefield

HOA Reserve Funds: The drawbacks of Underfunding Reserves

We hear all the time that association boards want to avoid the confrontation and unpleasantness of raising monthly fees. In fact, sometimes when an association has a "surplus" in their saving account members want to roll back fees because they feel like they are flush and need the money for personal expenses. In most cases this is a dangerous move because when associations need a roof, exterior paint or major repairs it represents a significant expense.

In this depressed economy, association managers are frequently fielding questions from boards about whether they can stop or reduce their funding for reserves as a way to ease homeowner expenses. In Washington State the Condominium Act does not stipulate how much associations have in reserves however FHA does want to see at least 10% of an annual budget going into reserves. Most mortgage underwriters will want to see at least that much and they may even want to see how well the association is funding reserves.

Typically when a major repair or maintenance is needed and there are insufficient funds in the reserve account the board will get the brunt of the criticism. This is also why all association should carry errors and ommissions insurance just in case association members feel like there has been a mismanagement of funds.

This is also when board members' fiduciary duties are questioned. Association members will be asking how did we get ourselves into this position frequently forgotting they were the ones who voted against any fee increase!!!
The only way an assoication board can really know where they stand is to get a reserve study. The reserve study will tell them what the conditions of the common property is and what the costs for the major maintenance items will be. The study will also look at the current members fees and show where the association is in its funding plan for the common property.
Its rare we see an association that is 100% funded, in most studies we have performed the associations are significantly behind in their savings plan. Most can catch up without special assessments but the board will have to take a "tough love" approach with members to get an adequate increase in monthly fees. Its always better to pay small payments that one large bill.

Pacific Crest Reserves
WWW.PacCrestReserves.com
360-588-6956
Fax 360-588-6965
Toll Free 866-618-7764

These are difficult times for many condominuim associations. Investors and owners who were on the bubble may be walking away or defaulting on association fees. Either way the COA boards may be in the difficult position of dealing with foreclosed units. Unfortunately the costs to maintain the common property do not change and in some cases the costs increase. For example in colder climates the association is having to pay the heating bills on empty units to prevent more water damage. For example in smaller complexes maintenance fees, may now be split eight ways instead of 10 becoming an increasing financial burden, especially for the owners on fixed incomes.

An owner's association can force the issue by filing a foreclosure action himself to collect maintenance fees, but that will cost thousands in legal fees, money that they may not have to spend. Washington is among the few states that give homeowners associations a "super lien" that puts them ahead of mortgage holders in a foreclosure, but the most they can recover is six months worth of fees.

Owners fed up with increasing association fees can try to sell their units, but with the likelihood of taking a substantial loss themselves. However once buyers discover that there are foreclosed units they may be reluctant to buy into an association that is carrying an extra financial burden. Many mortgage companies underwriters will want to see the makeup of owners and adequate reserves before they will loan for a condo.

COA's can use reserves to cover some of the fees but under current rules that money will need to go back into reserves within two years. Unfortunately foreclosed condomiums are a problem for everyone.

Pacific Crest Reserves
WWW.PacCrestReserves.com
360-588-6956
Fax 360-588-6965
Toll Free 866-618-7764

I spoke to a caller who was asking about special assessments and how legal they were especially for someone who had owned thier unit for less than a year. This caller didn't even know that a special assessment is a demand for money that is in addition to the regular annual or monthly dues or maintenance fees. I explained that special assessments can be levied against owners for various reasons. Many times the reasons don’t make sense to the owners. Owners may refuse to pay them, especially if they didn’t know about them in advance, but there are consequences to not paying. Owners sometimes think they had “a fast one” pulled on them.

Unfortunately this particuliar owner did not do diligence before buying. In most cases these assessments do not come out of the blue. They occur for number of reasons:

* Deferred Maintainance - The board put off a maintenance project and in doing so the increase the cope of the project.

*Under estimates the cost of materials, services, and labor, the amount set for the operating budget was insufficient.

* No reserve study was done and the reserve funds are low.

* A shortfall in dues collections.

* The board does not want to increase dues to realistic levels so they depend on special assessments to fund large projects.

The caller then said they wouldn't pay. Unfortunately as an owner they are obligated to pay. Once the board makes the decision and votes to have a special assessment the owners are legally bound to pay. I suggested to the caller that she take the condominium governing documents to a lawyer for review. I am sure that for a fee the lawyer would explain everything that I just told her.

Unfortunately many condominium buyers do not look at the health of the association before buying. Its always a good step to talk to the neighbors and find out whats going on as well as getting financials and meeting minutes. Your REALTOR can help secure some of these documents during your inspection period.

Pacific Crest Reserves
WWW.PacCrestReserves.com
360-588-6956
Fax 360-588-6965
Toll Free 866-618-7764