The Reserve and Collections Steps Most HOA Boards Skip Before Budget Season
In part one we covered pulling the right reports, reviewing your delinquency picture, budgeting with a cushion, and knowing your true accounting costs. This post covers the three steps that protect your community’s long-term financial health: getting a reserve study, protecting your reserves, and setting a collection policy that actually gets followed.
Dust Off or Get a Reserve Study
There is no rule of thumb for how much your HOA should be saving for reserves. Every community is different. A small HOA of single-family homes has completely different needs from a mid-sized condo community. Common elements vary. Ages vary. Conditions vary. A number that works for one community may be entirely wrong for another.
What you need is a reserve study conducted by an accredited reserve study specialist. These professionals assess your community’s common elements, their age and current condition, and tell you exactly what you need to set aside and when. You can find an accredited specialist through CAI at caionline.org. Some states require a reserve study annually. Check your state law. If you cannot do it every year, do it every couple of years at a minimum.
A reserve study is the most important document you can have going into budget season. It replaces guesswork with a specific number tied to a specific plan. Without it, your reserve contributions are essentially a guess, and guesses almost always end in a special assessment.
Never Borrow From Your Reserves
This one comes up more than it should, and the consequences are almost always worse than the problem the board was trying to solve.
When the operating budget runs short, some boards look to reserve funds to cover the gap, planning to pay it back later. That plan rarely works. The same budget pressures that caused the shortfall in the first place do not go away, and repayment keeps getting deferred. Meanwhile the reserve balance sits lower than it should, and the repair need it was set aside for does not disappear. It just waits, and it usually gets more expensive while it waits.
Reserves exist for one purpose: capital replacement and major repairs. If you borrow from them and the expense arrives before repayment happens, the community faces a much larger special assessment than it would have if the board had budgeted properly in the first place. In many states, statutes explicitly prohibit borrowing from reserves earmarked for capital improvement or replacement projects. The legal risk compounds the financial one.
Fund your reserves with surpluses from the operating budget. That is the direction the money is supposed to flow. Once you reverse it, you have already created next year’s problem.
Set Your Collection Policy Before the New Year
A collection policy tells your board exactly what happens when a homeowner does not pay: what goes out at 30 days, what happens at 60, and what steps are taken at 90. Without a clear, written policy that is followed consistently, delinquencies grow unchecked, and that affects the operating income the entire budget is built around.
The policy needs to be in writing, up to date, and applied uniformly to every homeowner without exception. Uniform enforcement is not just good financial practice. It is legal protection for the board. Applying the policy selectively, following up with some homeowners and not others, exposes the board to claims of preferential treatment that can create real liability.
In most states, associations can place a lien on a property when a homeowner does not pay. That tool exists for a reason. The communities that carry zero delinquencies are almost always the ones with a consistent, well-enforced collection policy that the board follows every time, for every homeowner, without exception.
Together, these three steps, a current reserve study, protected reserve funds, and a consistently enforced collection policy, form the foundation of a community that does not get caught off guard by financial problems it could have seen coming. Budget season is the right time to make sure all three are in place.
If you would like to understand how Community Financials can help your board prepare for budget season, we would be glad to have that conversation.
Schedule a consultation or call 833-CONDO-HOA.
Important Disclaimer: This post is for educational purposes only and does not constitute legal, tax, or financial advice. State laws governing HOA reserve funds and collections vary significantly. Always consult a qualified attorney and CPA for guidance specific to your community and state.
