Is your HOA's reserve fund as healthy as you think?

Ask almost any board member what a healthy reserve fund looks like and you will likely hear the same number: 70% funded. It is the first figure that shows up when you search online, and it has become shorthand for "we're in good shape."

In this episode of The Uncommon Area, Matthew Holbrook sits down with Andrew Stoutenburg of Reserve Advisors to take a closer look at what percent funded actually measures, where it falls short, and what boards should be paying attention to instead.

Andrew's answer may surprise you. Many of the funding plans Reserve Advisors stands behind never climb above 30% funded, and those communities are exactly where they need to be. The goal, as Andrew puts it, is having the right money at the right time.

The conversation starts with the basics. Andrew explains why every association needs a reserve study, even a brand-new community where everything still looks perfect. Assets begin to deteriorate the moment they are installed, and in many new developments the pool and clubhouse have been in use for years before homeowners ever take control of the board. He also has a simple answer for owners who plan to move in a few years: reserve contributions pay for your own use of the roof, the paint and the pool while you live there.

From there, Matthew and Andrew dig into the numbers. Andrew walks through how percent funded is calculated, why the same score can mean very different things depending on where an asset is in its life, and how baseline, threshold and full funding plans compare.

Then the conversation turns to a change every condominium board should know about: Fannie Mae and Freddie Mac are raising their reserve contribution guideline from 10% to 15% of annual assessments, and lenders will be reviewing more documents before they underwrite loans.

The conversation also tackles:

• Does a new community really need a reserve study?
• How is percent funded calculated, and why can it be misleading?
• What does it mean to be adequately funded?
• What do Texas and California require when it comes to reserves?
• What do the new Fannie Mae and Freddie Mac rules mean for condos?
• What is the difference between a Level 1, Level 2 and Level 3 reserve study?
• What happens when an asset like plumbing was never included in the study?
• When should a repair come out of reserves instead of the operating budget?
• Can reserves pay for upgrades and improvements?
• Which assets actually drive your reserve funding?

Andrew's central message is simple: without a reserve study, you're flying blind.

And for boards that already have one, Matthew adds, the study is only as valuable as the information behind it.

Key Takeaways

Start early. Andrew says communities that begin reserving from day one find the plan far easier to follow than communities that wait until decades in.

Look beyond percent funded. Percent funded is a snapshot of your balance at one point in time. It says nothing about whether your contributions are on track.

Know the new condo rules. A condominium contributing less than 15% of its assessments to reserves will need a reserve study from the last three years that supports its funding level.

Use the "regular but not annual" rule. Projects like repainting and seal coating belong in reserves. Work done every year belongs in the operating budget.

Watch for missing assets. As communities age, plumbing and electrical systems are among the most common components that were never reserved for.

Focus on the big five or six. A handful of major assets, such as roofs, typically drive most of an association's reserve funding.

What Boards Should Do Before the Next Reserve Study Update

Andrew and Matthew's advice for HOA boards and managers is straightforward:

1. Confirm your association has a current reserve study.
2. Ask your reserve analyst whether your contributions will fund each project on time.
3. For condominiums, compare your reserve contribution to the new 15% guideline.
4. Share maintenance records and recent repair history with your analyst.
5. Ask whether aging systems like plumbing and electrical are included in the study.
6. Identify your five or six largest reserve components.
7. Before using reserves for an upgrade, consult your reserve analyst and attorney and document the decision in your minutes.

As Andrew puts it, nobody heads out on a road trip without a map, and a reserve study is the map for your community.

About Andrew Stoutenburg

Andrew Stoutenburg is a reserve study professional with Reserve Advisors. He works with boards and managers to plan for the long-term repair and replacement of their communities' shared assets, from high-rise condominiums to large single-family communities.