How much should an HOA have in reserves? This reader wants to know how much an HOA should have in reserves and what happens if it’s too much.

Q: Can a homeowners association have too much cash in reserves? If they do, what are the consequences?

How Much Should an HOA Have in Reserves?

A: Your question is interesting because we haven’t encountered too many homeowners associations with reserves that are too high. We usually hear about HOAs that have no reserves or too little in the way of cash on hand. When something goes wrong or whenever there is a need for additional funds that are outside of the annual budget, these associations are quick to levy special assessments on their owners. 

When an association’s cash reserves are high, the association has sufficient funds for repairs to the roof, tuckpointing, replacement of mechanicals and other items. Larger associations will engage the services of a company (or, sometimes will hire several different types of companies with a variety of expertise) that specialize in determining what expenses will need to be made to keep up the property. Based on those anticipated expenses, the association can decide what sort of assessments will be needed to keep up with anticipated expenditures for the next five, 10 or even 20 years. 

When an association has ample reserves, homeowners can relax with the knowledge that the property is well-managed and don’t have to worry about paying a costly special assessment for repairs or replacements of building components. We know of a 40-year old building in Chicago that levied a $50,000 special assessment on unit owners to repipe the property. No one wants to get a surprise like that slipped under their door.

What Happens If an HOA Has Too Much Cash in Reserves?

You ask whether an association can have too much cash in reserves. So, what’s “too much?” 

Associations that have high reserves tend to have lower monthly assessments. But Fannie Mae and Freddie Mac, the buyers of mortgages in the secondary market, usually require associations to contribute around 15 percent of the annual budget towards reserves. We’re going to guess that if you think your homeowners association has too much in the way of cash reserves, you’re wondering whether assessment can or should be cut.

Well, if the board was certain that additional contributions to the reserves are unnecessary, because any known expenses are fully covered and anything unknown wouldn’t be big enough to drain a significant portion of the reserves, There a number of ways a board can deal with the monthly assessment charge and the yearly contribution to assessments. At the highest level, the board has the power to waive the payment of a monthly assessment or to lower assessments in the future. 

But in general, we don’t see a harm (or negative consequences) to an association that has high cash reserves unless the association is poorly run and the board goes on a spending spree to spend the reserves without a real plan or for the sake of just spending money.

Evaluating HOA Costs and Reserve Funds

The real question you should ask, is how much is too much? It depends on the property. Low maintenance properties may find that having a cash reserves that cover a year or two of expenses is plenty, whereas an older property with higher annual maintenance costs that is also facing a major expense (like a repiping or new elevator system) might require a special assessment no matter how much is set aside in cash. Finally, with interest rates at historic lows, we know that some buildings will prefer to borrow the cash to make the repair, raising assessments slightly over a period of years rather than hitting residents up with a large single payment.

As a next step, you might want to talk with the president of your homeowners association about your concerns and ask for a copy of the last two years’ worth of board minutes. These will give you an idea of what sort of repairs or replacements are recommended and an understanding of what they are expected to cost. If after looking at the information you are still concerned about how much cash your building has in reserve, you can talk to the board and your fellow owners about lowering assessments.

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