Four Ways to Pay for Reserve Expenses
By: Robert M. Nordlund, P.E.
There are four ways to pay for your Reserve expenses. The first way even provides you a bit of magic - getting a "rich relative" to help you with your Reserve expenses.
The way to pay the least amount of money for your Reserve expenses is to make regular deposits into an interest bearing account. You pay some, and the bank (your magic "rich relative") pays some. And think - over time you earn interest on interest! For a 20 or 30 unit association, it is like having another homeowner making contributions.
Method #2 is to special assess when the funds are required. This is a "straight shot" - right from your pocket to the vendor. If you need a $100,000 new roof, a $100,000 special assessment takes care of it. No help from your "rich relative" on this one, unfortunately.
Method #3 is to get a loan. In this case, assuming you measure up to your rich relative's standards, you end up paying your "rich relative's" money, not getting it from him. A $100,000 roof will end up costing the association a great deal more than $100,000, even though the payments are broken down pretty small and spread over a number of years. If you had made small payments over a number of years prior to the expense (Method #1), that new roof would have cost association members much less than $100,000.
Method #4 is the simplest method, because association members do nothing, but it is by far the most costly. When necessary Reserve projects are deferred, they don't go away. They just get bigger. That $100,000 roof project can quickly turn expensive when you add up interior water damage. A simple ironwork paint project gets expensive when painting is now wasted effort, the entire fence has to be replaced. In addition to expenses only getting larger (the association is only digging themselves a deeper hole to get out of), the negative effect on Real Estate values is serious business. On a "per unit" basis, saving $1000 per unit by not painting the association typically brings property values down by three to five times that amount. Think of that - by saving $1000 by not painting the place, your home dropped in value $3000 to $5000. You didn't save money, you lost money!
Reserve expenses are inevitable. The only question is how well prepared the association will be, and how the association chooses to deal with those expenses. Inaction, in this case, is a very expensive course of action.
