Wednesday March 26, 2025
Disclaimer: This article is for informational purposes only and does not provide legal, financial, or tax advice. Always consult your association attorney and property management company for guidance on underfunded HOA reserves specific to your Texas community.What are underfunded HOA reserves?
Underfunded homeowners association (HOA) reserves are reserve funds that are less than 70% funded and lack the resources to pay for major future repairs, upgrades, or replacements. These funds typically come from homeowners’ regular assessments, set aside in a special reserve account distinct from the association’s operating budget. In an ideal world, an HOA’s reserve fund would have enough savings to cover both predictable and unexpected capital expenses over time. Unfortunately, up to 72% of reserves are underfunded, according to experts at FirstService Financial, which provides best-in-class financial services for FirstService Residential-managed communities.Causes of underfunded HOA reserves in Texas
Several factors can contribute to an HOA reserve fund becoming underfunded:- Increased costs: Even well-intentioned boards may be faced with higher-than-anticipated costs. Market fluctuations, unexpected damage, or inflation can make earlier estimates fall short.
- Minimal or outdated reserve studies: A reserve study (an in-depth inspection of the community’s physical components that predicts when they’ll need repairs or replacement) is essential. If the board does not update the study regularly or never obtains one, it becomes easy to fall behind in building up the required reserve level.
- Delinquent assessments: If some owners do not pay their dues consistently or if the board does not handle delinquency issues, the money flowing into reserves diminishes.
- Operating shortfalls: Sometimes, if an operating budget runs a deficit, boards might “borrow” from the reserves to cover day-to-day costs. Without a clear plan to replenish those funds, a once-healthy reserve can be depleted.
Risks of underfunded HOA reserves
Some HOA boards may opt to keep reserves lower in an effort to artificially reduce immediate homeowner dues. In the short term, these minimal assessments may appeal to homeowners or make properties more attractive to buyers who prioritize lower association fees. However, the potential drawbacks far outweigh any short-term benefits.If a key building component fails (like a roof collapse) and the reserves can’t cover it, the association must scramble for funding. That might involve imposing a steep special assessment or obtaining a loan. Conflicts can erupt if owners question past decisions that led to underfunded accounts. Additionally, prospective buyers do not like the uncertainty of an HOA with minimal reserves. They might fear future special assessments or mismanagement and choose to avoid the community entirely. Mortgage lenders often consider the state of reserves when deciding on financing, so underfunded HOA reserves can make certain loans harder to secure.
What to do if your HOA has underfunded reserves
If you are struggling with underfunded HOA reserves, there are several proactive steps that board members and homeowners can take to improve financial health:-
Conduct a reserve study (or update it)
Hiring a reputable firm to perform (or update) a reserve study can be one of the most direct ways to assess shortfalls. These experts examine the common elements like roofs, sidewalks, pools, and other shared infrastructure and estimate their lifespan and replacement costs. A thorough study helps the board figure out how much should be allocated annually to meet both foreseeable and unpredictable expenses without resorting to emergency measures.
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Adjust regular dues gradually
If an HOA has historically kept dues low, a moderate, steady increase over several cycles can be less jarring than a large one-time jump. This approach can help the reserves catch up without imposing immediate heavy burdens on homeowners. Consider publishing a breakdown of why the increase is needed and precisely how it will improve the reserve fund’s standing. Residents often appreciate clarity, especially if it means fewer surprises in the long run.
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Look for ways to reduce ongoing expenses
If the HOA’s operating budget is also stretched, looking for efficiencies like renegotiating vendor contracts can free some funds for reserves. Reducing essential services or neglecting routine maintenance can backfire, leading to higher costs in the long run. The focus should be on cost-effective management, not bare-bones operation.
FirstService Residential has established relationships with a network of trusted service providers in Texas. This often allows our clients to secure better pricing, streamlined scheduling, and less administrative hassle. Our team can also handle bidding and vetting, so board members don’t need to become overnight experts.
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Loans
Borrowing money for capital projects has become a common practice among associations. Unlike a special assessment, a bank loan allows unit owners to pay for the project over an extended period and potentially spread the cost of improvements over generations of homeowners. Of course, loans do come with interest and fees, but they can be a viable option for associations taking on a large and costly project. Many banks will extend long repayment periods to associations — up to 15 or 20 years instead of the typical 10-year limit, which can reduce monthly payments and helps create less of a financial burden for homeowners.
Communities managed by FirstService Residential have exclusive access to its affiliate FirstService Financial, which delivers best-in-class financial and insurance programs and services to protect and enhance the value of our clients’ properties through extensive buying power, potentially reduced interest rates, all through local banking institutions.
One master-planned homeowners association partnered with FirstService Financial when they made the decision to purchase a nearby golf course. With such a major investment, it was critical to find the most competitive loan rates. Karla Chung, vice president of FirstService Financial, worked with community manager Kamin Havens to help the HOA secure a substantial loan. Havens noted, “Very few banks want to approve a loan for a golf course. But after partnering with Karla from FirstService Financial, we were quickly approved for a 15-year loan for $2.2 million.”
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Special assessments
A special assessment requires homeowners to contribute extra funds to cover the costs of a capital improvement project. If your reserve funds are insufficient to cover a necessary project, or if the expense was not accounted for in your reserve planning, this option is sometimes unavoidable.
While a special assessment allows the association to avoid taking on debt, it is also the least popular option among homeowners. Large, unexpected assessments can create hardship for residents, who may challenge the decision or direct a lawsuit against the association for neglecting its fiduciary responsibilities. If homeowners cannot afford the additional payments and require a payment plan, the association may need more funds to begin the project and pay it in full. Before imposing a one-time special assessment on your community, check your governing documents and consult with your association’s attorney.
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Engage residents and communicate plans
A transparent board that explains the importance of reserves can earn greater owner support. Show owners exactly how the reserve fund preserves property values, mitigates risks, and protects everyone’s investment. Encouraging homeowners to attend open meetings, publishing clear and easy-to-read budgets, and highlighting upcoming projects can help residents understand how their dues are used.
Contact FirstService Residential today for expert advice on reserve fund planning, budgeting, and community management.