You may have noticed that reserves are an element of the Association budget.  Each year at budget time, the board determines the cost of ongoing maintenance and a prudent amount to add to “Reserves” or the Association’s savings fund.  Just like personal savings or retirement, saving early ensures that the monies do some of the work—interest earnings mean you have to save fewer actual dollars in order to get the same results.

An Association can also undertake a Reserve Study to determine the remaining life in association assets (how many years until new mailboxes are needed, roads need to be re-asphalted, etc.?) and the proper amount that needs to be in savings to cover future maintenance.

Association assets, like roofs, siding, asphalt roads, fencing signage, trees and landscaping, all need to be replaced from time to time, regardless of whether the expense is planned for.  A Reserve fund is required by RCW of condos and most HOAs and is a prudent tool for saving for the future, and avoiding special assessments later.

Some other important reasons money is collected and put into Reserve Funds:

The State of Washington requires that Associations have a reserve study at minimum every three years.  Condo Associations must provide their report to prospective buyers in the Resale packet prepared for every sale.

Reserve funds meet legal, fiduciary and profession requirements.  A replacement (or reserve) fund may be required by:

  • Any secondary mortgage market in which the Association participates (e.g. Fannie Mae, Freddie Mac, FHA, VA)
  • State statutes, regulations, or court decisions
  • The Association’s governing documents

Reserve funds provide for major repairs and replacements that will be necessary at some point in time.  Although a storm pond line may last 10 years, all owners need to share its replacement costs, not just those living in the Association when replacement is necessary.

Reserve funds minimize the need for special assessments or borrowing.  For most association members, this is the most important reason.

Reserve funds enhance resale values.  Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate.  Many states require Associations to disclose the amounts in their reserve funds to prospective purchasers.