Homeowners Associations (HOAs) periodically undertake capital projects to maintain properties, increase their value, and improve aesthetics. Two common ways that HOAs fund capital projects are with assessments and reserves. The best funding method for your HOA’s capital project will depend on several important factors.
What Are Assessments?
HOAs typically collect monthly dues from homeowners to cover operating expenses, but the dues may not always be sufficient for capital projects. An assessment is a temporary additional fee that an HOA may require homeowners to pay for large projects, like for a roof replacement or new siding, security enhancements, building new recreational areas, and other things.
If an HOA approves a special assessment for a capital project, it is mandatory for all homeowners in the community. An assessment can be a one-time fee, or it can be an additional monthly fee that homeowners pay in addition to their regular dues for a specific period.
- Immediate funding: With an assessment, an HOA can quickly acquire the necessary funds to complete a capital project. The assessment can be used to repay a loan, and there is no need to wait if the project is urgent.
- Maintain reserves: An HOA may not have to dip into its reserves if it uses an assessment. This could help it budget for future repairs, emergencies, and other expenses.
- Risk of non-payment: Because an assessment is a fee that homeowners must pay in addition to their regular monthly dues, it may cause financial hardships for some. Some homeowners may struggle to make the payments, which could result in disputes, late fees, and legal action.
- Negative impact on property sales: If a homeowner needs to sell, it may be difficult to attract potential buyers if there is a long-term monthly assessment. The added expense will make the cost of ownership less affordable to many, especially first-time buyers.
What Are Reserves?
HOA reserve funds are long-term savings that an HOA builds over time from homeowners’ monthly dues. Reserve funds are usually used to maintain home exteriors, common areas, amenities, and other things.
Some HOAs may elect to use their reserves for capital projects, which could decrease their savings for operating expenses. If an HOA board plans on implementing a capital project, however, it could vote to increase its monthly dues to grow its savings.
- Reduced financial stress: If reserves are used for capital projects, homeowners don’t have to worry about financial hardships from assessments. Less financial stress could reduce disputes and the need for legal action.
- Save money on interest: If an HOA uses its reserve fund to pay for a capital project, it won’t have to take out a loan, which will save money on interest. Depending on the cost of the project, the savings could be substantial.
- Slow accumulation: Building sufficient reserves for a capital project may take several years. If a project is urgent, an HOA may not be able to wait.
- Limited financial flexibility: If an HOA reserve is used for a capital project, the association may be left unprepared for emergencies. A fire, flood, or other unexpected event may require a special assessment or leave the HOA unable to afford its operating expenses.
Consider Using a Balanced Approach
Using a balanced approach to fund HOA capital projects may help to reduce the financial shock of a large assessment to homeowners. With a balanced approach, an HOA could increase its monthly dues by a small amount to save for future capital projects. If additional money is needed, a small assessment can be used to make up the difference.
This approach may significantly reduce the assessment amount if one is needed. It is also less likely to result in disputes or financial hardships, which may help to preserve the harmony and financial stability of the community.
Which Funding Method Should You Use?
The best funding approach for a capital project will be different for each HOA. Be sure to carefully consider your association’s ability to meet its current operating expenses and whether it will have a sufficient financial cushion for emergencies before choosing a funding option. Homeowners’ financial ability to pay for an assessment should also be considered.
Using a balanced approach may help you save for capital projects while ensuring you have sufficient reserves for other expenses. A reserve study should be done periodically to help you plan for your future needs, and an assessment can also be used as a last resort if additional funds are needed.