Formula or Rule of Thumb for Condo Reserves? (foreclosures, rental)

[jwhite58502]

I know there are a lot of variables to consider but is there a General Rule Of Thumb of adequate reserves in a condo association, maybe based on so much per unit, or some other such thing? Thanks in advance

[bbronston]

The state says that reserves should be set aside for roofs, painting, resurfacing pavement, and replacement or deferred maintenance items that cost more than $10K. The formula for the annual required set aside is calculated by estimating the cost of the work and dividing that by the number of remaining years of useful life. Hope that answers your question.

[photoman_6]

Originally Posted by bbronston

The state says that reserves should be set aside for roofs, painting, resurfacing pavement, and replacement or deferred maintenance items that cost more than $10K. The formula for the annual required set aside is calculated by estimating the cost of the work and dividing that by the number of remaining years of useful life. Hope that answers your question.

what he said. Also, you might want to hire an expert. Lightpoles, perimeter walls that need to powerwashed and painted every few years, pool equipment. It all adds up.

[Restrain]

Professional condo management companies have a good handle on these costs. If you are with an association, it might pay you to get a consult from one.

[Cardiff by the Sea]

Don't know about here, but in California the rule of thumb was aimed at the annual budget. The HOA budget had to have a line item reserving 10% of total revenues to the reserve fund. Lenders would not approve mortgages in complexes that were not funding reserves at the 10% rate. There was a state law than set that guideline for HOAs.

Reserves are intended to replace components that wear out, like a roof, parking lot, light fixture, elevator, etc. or to replace parts of a larger component. Reserves are not for ongoing maintenance like mowing the lawn. A reserve study identifies every single thing in the building or complex that will wear out and need to be replace. The professionals who prepare reserve analysis use national studies of the average life of each component and how much it will cost to replace each component factoring in inflation and its life span. The sum of these costs is what it takes for an association to have a fully funded reserve. Of course no one has this cause why should people pay up now for costs that will not occur for 15 years. The idea is to have the money there to replace things when they hit the end of their life spans.

Here are three examples of the range of funding in complexes than I am familiar with--all in California.

I lived in a 9 unit building and we had a reserve study done. The 20 year funding needs were a rather shocking $250,000 to be fully funded. To be fully funded, we should have been budgeting $12,500 per year. In fairness, I combed that study with a fine tooth comb and thought the expected lives of components were too short and the replacement costs were too high, so the $250,000 was a worst case scenario. Our annual revenues were $44,000 and we funded $4,400 per year to the reserve fund.

And the balance of our reserve fluctuated between $10,000-12,000. That is only slightly over $1,000 per unit which is really too low. We actually spent more than that some years but we assessed ourselves to cover it. One year we assessed ourselves $6,000 per unit to paint and treat for termites. And we got a lot of bang for our buck on maintenance because we were so hands on. We learned early that vendors gouge HOAs because no one feels like it is their money.

The philosophy of that HOA, because it was so small, was to keep the money in the owners pockets and fork it out when a project came up. That only worked because there was 100% attendance at the annual meeting and everyone was involved in the decision. And it was always a conflict between those who wanted a high reserve to impress potential buyers and those who viewed the reserve fund as serving the purpose of replacing components and therefore components should be replaced as need and the fund spent on those replacements. Said another way "is maintenance subservient to the fund, or is the fund subservient to maintenance. Is maintenance the goal or is having a fat fund the goal.

We owned rental units in 5 different complexes. I only remember two of them. One had about 80 units and reserves of about $200,000 so that would be about $2,500 per unit. Another one which had about 100 units had a reserve fund of $1,100,000 which is over $10,000 per unit. That complex had an $800,000 annual operating budget and had a $30,000 loss last year. (Hubby just pulled the financials out of the drawer for me).

HOAs had a really hard time after the 2007 housing meltdown. All those pre-foreclosures were not paying HOA dues. Most complexes ran operating losses in the annual budgets and dipped into reserves to stay afloat. As the foreclosures worked their way through, the banks repaid unpaid back dues when they sold. So things are better now.

If there is a condo complex you are interested in, as part of escrow, you should get the reserve study if thee was one done, and you should ask for multiple years of financials, not just the past year. And there reserve balance is pretty irrelevant unless you know how much deferred maintenance there is.

There is a wealth of information out there if you google reserve funding.

[imagardener]

Are you asking from the standpoint of a potential buyer?

You will need a lot of information that may be difficult to get because most owners don't know what their association is responsible for (painting, paving, replacing, etc). You need to know what estimated costs are to do these maintenance, repairs and replacements and how often they need to be done.

The best person to answer this is either the condo manager, if there is one, or the person on the condo board who oversees the finances. Ask to see the annual budget and see where the Reserves are listed and how much is contributed to Reserves each year. Some condo associations do not like to put money into Reserves, instead pay-as-needed by passing a special assessment.

I've owned 3 condos and "pay-as-needed" is especially popular with the older crowd who don't even buy green bananas :-) One of the reasons I'll never own a condo again is I like to put money in Reserves for maintenance but the condo board (that I was on) spent Reserve money on vanity projects that benefitted themselves and their cronies.
Condo board paid $$$ to have a Reserve study done which was then ignored.

Good luck finding out about Reserves.

[Cardiff by the Sea]

Originally Posted by imagardener

Are you asking from the standpoint of a potential buyer?

You will need a lot of information that may be difficult to get because most owners don't know what their association is responsible for (painting, paving, replacing, etc). You need to know what estimated costs are to do these maintenance, repairs and replacements and how often they need to be done.

The best person to answer this is either the condo manager, if there is one, or the person on the condo board who oversees the finances. Ask to see the annual budget and see where the Reserves are listed and how much is contributed to Reserves each year. Some condo associations do not like to put money into Reserves, instead pay-as-needed by passing a special assessment.

I've owned 3 condos and "pay-as-needed" is especially popular with the older crowd who don't even buy green bananas :-) One of the reasons I'll never own a condo again is I like to put money in Reserves for maintenance but the condo board (that I was on) spent Reserve money on vanity projects that benefitted themselves and their cronies.
Condo board paid $$$ to have a Reserve study done which was then ignored.

Good luck finding out about Reserves.

Ha ha

The average age in our condo building was about 35 and they didn't want to fund it either. No one likes to give their money to the HOA and they prefer to loot the HOA treating it like a secondary insurance policy on their unit.

And like you, we will never buy a condo again. Every couple of days Hubby and i look at each other and say we are happy to be out. It is like being in a sack race with people lacking good sense.

[GreggT]

There is supposed to be a Reserve Study done every 3 years based upon Florida Law. The study lays out the anticipated replacement costs and useful life of all the items that should fall under the Reserves (basically everything that is not considered an expense). Normally a professional firm is hired to do the study then reviewed by the board. It dictates how much should be set aside for Reserves. If the board decides to not fund the Reserves at 100%, an owners vote must be taken to approve what ever the percentage the board proposes.

[jwhite58502]

all replies very helpful and appreciated, we are looking at buying in future never been in a condo or a HOA so starting to research such things now, thanks very much

[imagardener]

If the board decides to not fund the Reserves at 100%, an owners vote must be taken to approve what ever the percentage the board proposes.

You are correct. The way the law reads (from memory) is that owners (the few that vote) must approve NOT funding the Reserves fully or at all for the year. This was done year after year until the state passed a law making Reserves mandatory for condo associations (although not for HOA's).

The other neat trick I observed by an unethical manager is they gladly spend Reserve money when not needed because they get a kickback from painting companies for hiring them for $15,000 job. The last condo we owned the manager kept hounding me (I was condo pres.) to get the 12 unit condo painted when it clearly did not need it, just needed pressure wash to remove mold. 2 months after we sold our unit the new condo pres. OK'd painting.There were 6 condo assoc. under this manager, imagine his nest egg from this alone.