L.K. from Tolland County writes:
Dear Mister Condo,
I am looking to buy into a condo association that has been around for about 10 years and presently has 50 plus units and is still building. Is there a general rule of thumb in terms of what the HOA should have in its capital reserve fund?
Mister Condo replies:
L.K., the short answer is “no”. Reserve Fund needs are as unique as the communities they are used to upkeep. The FHA has made a policy of not offering to insure mortgage loans for communities that do not set aside a minimum of 10% of their annual common fees as a Reserve Fund contribution. While that number may be easy to measure, it does not tell the story of what that money will be used for, which is to repair or replace all of the association’s common elements and long-term capital improvements. In an association that offers few or no amenities, there will still be monies needed for roofs, sidewalks, decks, and paint or siding maintenance. Depending on the amount of money that will be needed, a 10% Reserve Fund contribution may only scratch at the true needs of the association, which are quite often closer to 25% or more! Add in amenities like pools, clubhouses, tennis courts and such and that number could climb closer to 30% or higher. Of course, higher Reserve Fund contributions mean higher common fees. Higher common fees can cause potential buyers to go elsewhere so it is not uncommon for associations to keep their fees artificially low so that there is more demand for their unsold units.
I have no problem advising you to purchase into this association as long as you do so with your eyes wide open. A healthy Reserve Fund is impossible to determine from just looking at how much money has been saved or what current percentage of common fees are being contributed. You need to look at a Reserve Study which forecasts what the cost of repair and replacement to the common elements is likely to cost and then determine if the Reserve Fund is properly funded. Good luck!
General Rule of Thumb for Condo Reserve Fund?: http://t.co/AvopqeQaXk
RT @AskMisterCondo: General Rule of Thumb for Condo Reserve Fund?: http://t.co/SaIwke8iiy
RT @AskMisterCondo: General Rule of Thumb for Condo Reserve Fund?: http://t.co/SaIwke8iiy