Equipment and major components (like the roof) must be replaced from time to time, regardless of whether we plan for the expense. It is preferable to set funds aside and plan the timing of large expenditures such as these, of course. Reserve funds allow us to spread out these expenses more evenly and prepare for unexpected costs. There are a variety of reasons we put monies into reserves each month:
1. Reserve funds meet legal, fiduciary, and professional requirements.
A replacement fund may be required by a variety of individuals such as a secondary mortgage market in which the association participates. (ie. Fannie Mae, Freddie Mac, FHA, VA). State statutes, regulations, court decisions, or the community’s governing documents may also mandate these reserve funds. Massachusetts does not require any minimum reserve funds but most financing partners require 10%.
2. Reserve funds provide for major repairs and replacements.
We know that certain items such as heating systems, windows, roofs, and other components of the common property will need to be repaired or replaced after a period of time. Although a roof may be replaced when it is 25 years old, every owner who lives under or around it should share its replacement costs.
3. Reserve funds minimize the need for special assessments or borrowing.
For many association members, this is the most important reason as it saves them from writing a big check for a necessary expenditure. By paying a little more every month, they are able to better budget.
4. Reserve funds enhance resale values.
Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Many states require associations to disclose the amounts in their reserve funds to prospective purchasers.
For more information about the benefits of healthy reserves, contact your Charlesgate Property Management specialist today.