Evaluating an HOA's financial health is crucial before purchasing a home in a managed community. A financially sound association protects your investment and minimizes the risk of unexpected assessments or deferred maintenance.
Why Financial Health Matters
The financial stability of an HOA directly impacts your property value and living experience. A well-funded association can maintain common areas, make necessary repairs, and avoid special assessments. Conversely, a financially troubled HOA may defer maintenance, increase fees unexpectedly, or levy special assessments.
Key Financial Documents to Review
1. Annual Budget
The annual operating budget shows projected income and expenses. Look for:
- Realistic revenue projections based on collection rates
- Appropriate expense allocations for maintenance, utilities, and services
- Reserve fund contributions (typically 10-20% of total budget)
- Comparison to previous years' actual expenses
2. Financial Statements
Review balance sheets and income statements to assess:
- Current assets vs. liabilities
- Operating income vs. expenses
- Trends over multiple years
- Signs of financial distress (declining reserves, increasing debt)
3. Reserve Study
A reserve study identifies future capital needs and funding adequacy. It should:
- List all major components (roofs, elevators, pools, etc.)
- Estimate remaining useful life and replacement costs
- Calculate required reserve funding levels
- Compare current reserves to recommended levels
Red Flags to Watch For
Warning signs of financial trouble include:
- Underfunded Reserves: Reserves below 50% of recommended levels
- Frequent Special Assessments: Multiple assessments in recent years
- Deferred Maintenance: Visible signs of neglect or postponed repairs
- High Delinquency Rates: Many homeowners behind on fees
- Rapid Fee Increases: Frequent or large fee hikes
- Operating Deficits: Expenses consistently exceeding income
- Lack of Financial Transparency: Difficulty obtaining financial documents
- No Reserve Study: Association hasn't conducted a recent reserve study
How to Evaluate Reserve Funds
Reserve funds are critical for long-term financial health. Evaluate them by:
1. Funding Percentage
Compare current reserves to the reserve study's recommended funding level. Ideally, reserves should be at least 70% of recommended levels. Below 50% is a red flag.
2. Reserve Contributions
Check if the association is contributing adequately to reserves each year. Contributions should align with the reserve study's funding plan.
3. Reserve Usage
Review how reserves are being used. They should fund planned capital projects, not cover operating deficits.
Questions to Ask
When evaluating an HOA's financial health, ask:
- What is the current reserve fund balance?
- What percentage funded are the reserves?
- When was the last reserve study conducted?
- Have there been any special assessments in the past 5 years?
- What is the delinquency rate on HOA fees?
- Are there any planned capital projects in the next 5 years?
- How have fees changed over the past 5 years?
- Is the association operating at a surplus or deficit?
What Good Financial Health Looks Like
A financially healthy HOA typically has:
- Reserves funded at 70% or more of recommended levels
- Stable or gradually increasing fees (3-5% annually)
- Low delinquency rates (under 5%)
- Regular reserve studies (every 3-5 years)
- Operating surpluses or balanced budgets
- Transparent financial reporting
- Proactive maintenance and capital planning
- No recent special assessments
Conclusion
Evaluating an HOA's financial health requires reviewing multiple documents and asking the right questions. A financially sound association protects your investment and provides peace of mind. Take time to thoroughly review financial documents before purchasing, and consider consulting with a financial advisor or real estate attorney if you have concerns.