Your building’s reserves consist of assessment payments that have been saved in anticipation of future expenses. While building maintenance expenses are usually covered by the assessment you pay every month, a building with low reserves increases the chances that once a larger building issues arises, you will have to pay out of pocket, sometimes in the order of thousands of dollars. It is for this reason that home buyers always check on the state of a building’s reserves before purchasing.
Believe it or not, your building’s reserve fund is not determined arbitrarily. Usually, under the advice of your property management company, the Board will hire a firm every few years to survey the building and determine what the likely maintenance costs will be for the next term. Healthy reserves track this forecast closely, and attempt to stay at around 70% of these projected costs.
It is important to note that every owner can request a copy of the assessment survey (or reserve study) to ensure that their property has appropriate reserves. Sources agree that 20%-35% of your monthly assessment payment should go towards the building’s reserves. FHA approved buildings require at least 10% of the income be applied to reserves. If your building cannot match this percentage, you have a problem. Either funds are not appropriately managed, or your assessment is set too low. Of course, newer buildings that are in good condition typically need smaller reserves than vintage properties that require constant maintenance.
Potential buyers should also request a copy of the assessment report to ensure they are purchasing a property with healthy reserves. Hesitation on the part of the board when it comes to disclosure about the status of the reserves could signal trouble.