Failing to Reserve and Deferred Maintenance is a Recipe for Disaster
If you have ever served on the board of directors of an HOA, you know that some members are never happy to see their annual assessments increased. In fact, some folks can be downright hostile when faced with an increase. This can even be true when an assessment increase is absolutely necessary to adequately fund reserves to be financially prepared to handle major repairs and replacements to association common elements.
When boards are unwilling to propose essential assessment increases or members are unwilling to ratify budgets with these increases, it is not uncommon to see a couple of things happen. First, these associations tend to defer routine maintenance on common elements which reduces the remaining useful life of components like roofs, siding and asphalt. Second, these associations may not have enough funds in reserves to cover the costs associated with these major repairs and replacements. In such cases, without levying a special assessment or obtaining a loan to cover the associated costs, the infrastructure of these communities will begin to erode and eventually fall apart.
Evidently, as reported by ABC7, an HOA in Westminster is currently experiencing this nightmare. While it is unfair to speculate on how the association has been fiscally managed over the years and how ongoing maintenance, repair and replacement issues were addressed - let this be a lesson that every HOA must budget and plan for major repairs and replacements. Here are some recommendations:
1. Obtain a professional reserve study to determine the remaining useful life of components of the association that it is required to repair and replace. This reserve study will also provide the association with a recommended plan to ensure the funding is in place when the repairs or replacements must be made.
2. Use the reserve study as an essential budgeting tool. Look down the road to when major repairs or replacements to common elements will need to be made and how much money you will need to cover those costs. Determine whether your assocation will have sufficient reserves to cover those costs, whether you will need to levy a special assessment, obtain a loan or use a combination of these financing options.
3. Adopt the required Reserve Study Policy and follow it.
The bottom line is that boards and homeowners cannot afford to put their heads in the sand and refuse to face these necessary and major expenditures. It is always best to face these obligations early on and to position your community to meet them in a fiscally responsible way.