FOUR WAYS TO PAY FOR RESERVE EXPENSES
Robert M. Nordlund, P.E. (Association Reserves, Inc.)
There are four ways to pay for your Reserve expenses. The first way
even provides you a bit of magic - getting a "rich uncle" 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 uncle") 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 uncle" on this one, unfortunately.
Method #3 is to get a loan. In this case, assuming you measure up to
your rich uncle's standards, you end up paying your "rich uncle" 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 a 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.
