Avoiding Reserves Quicksand (2024)

Robert Nordlund 0:07
Hello and welcome. Often we prepare this type of reserve study content, these webinars to help you understand what that document is and what it contains. But today we’re focusing on you, the decision maker. Want to help you avoid the most common problems we see along the path to the future, which we’re calling reserves quicksand. Over and over again, we see associations get mired in the same general problems, and we want to help you avoid repeating those same mistakes. So we’re here today to help you avoid the quicksand we’ve seen so many other associations get stuck in the decisions you make. Set your association up, either for failure or success, so settle in, adjust your volume and get ready to avoid the mistakes others are making. And to do this today, we’ve enlisted some outside expertise, as you heard Paige explain just a moment ago, we’ve got Julie Adelman from Admin Inc, who, with her management and consulting background, is going to help set you up for success at your association. Well, this is the outline we’ll be using for today’s program, guiding you through an introduction how to identify quicksand, then getting out of quicksand, avoiding quicksand in the future, and then bringing it all together in a summary, avoiding reserves quicksand starts with knowing the hazards leading an association forward to the future is a journey, and since that future is uncertain, there’s trouble along the way if you stray from the path. And with reserves, we’re talking about every Association’s largest repair and replacement projects, the biggest opportunities you have to get it wrong. And while board members have the responsibility to deal with these problems, they regularly, unfortunately have the least experience. There’s nothing you can do to prevent these upcoming major repair and replacement projects. Mother Nature and Father Time See to it that everything is in a constant state of deterioration. So these big expenses are lurking, and many associations get stuck in the process of preparing for these big, inevitable, predictable projects. Well, I’m glad you came, because we’re going to help you today, see and understand and avoid these classic reserve problems, pretending they don’t exist dooms many associations to getting stuck and unprepared, and remember, the board with the Association of management has the task of leading the association safely into the future, and today, we’re here to help. So what are we trying to avoid? What are we trying to accomplish in the next 35 minutes or so, we’ll help you avoid costly deferred maintenance will help you avoid home values that lag other homes in the market and possible safety problems. Will help you get financially prepared to perform your reserve projects on time, which means avoiding special assessments, having a well maintained property higher owner enjoyment and maximize property values in this journey to the future. We’re sometimes make some comparisons to Dorothy on her journey to the Emerald City and the story about the Wizard of Oz. And you’ll see us helping Dorothy stay on the yellow brick road on the way to her destination.

Julie Adamen 3:35
Well, thanks, Robert. This is Julie Adam, and I’m really happy to be with you today, and with, of course, Paige, who’s our wonderful director and and and helping us get through this technological issues that we had earlier. Anyway, I just want to reinforce the idea that leading an association to the future is a real challenge, and you’re mostly board members out there. So I, I speak from my own experience. I have been a board member a couple of times, running for another one. Another one, but it is a credible challenge. And the i this idea of quicksand along the journey is very real, and it must be based on the number of associations that, as you know, we see unprepared for their own expenses, stuck in their decision making, or actually making foolish decisions. I hate to say that, but it’s true about how to get to the future. I’ll handle this section of the program. So in the next few minutes, I’ll be naming these problems, helping you, the listener, identify what might be getting your association stuck. Now, these are the types of quicksand, and we see what trouble with that trouble associations. So let’s just go through the list here, not collecting, meaning not collecting enough assessments, or preparing for the inevitable hoarding reserves. That means you typically think, oh, no, we can’t spend this money. We shouldn’t spend it at all, which is certainly not true or depleting reserves either. They were underfunded, and you had to spend enough money to get something done, and you have way fewer reserves than you should, or depleting them by spending the money on things perhaps that may have needed to be done, but really work reserve items or simply funding your operating account out of reserves, that’s a no no, but it happens very often minimizing reserve funding, meaning you’re thinking, well, the reserve study says we need to put X amount of dollars, and the board decides they don’t want to raise assessments or raise them enough to cover that. So you certainly are not funding your reserves as recommended by the study. Apathy is another big one that’s a huge problem in our industry on all kinds of levels, whether people are involved in the association or they don’t care what’s going on, and that means homeowners, so they’re not pushing the board or simply a board member, or board members, sorry, are apathetic to the issue of reserves. Indecision is a huge one I find over the years of Robert and I’ve been doing this business. I mean, I just really realized I’ve been in the business 40 years. I kept saying 35 but that was five years ago. So Indecision is a big deal because a lot of people just don’t know, or don’t feel comfortable making decisions that are literally worth 1000s and 1000s of dollars, so that that’s a big problem. And the last thing is fixating on the percent funded. So well we’re funded to this percent from a reserve study we had, you know, 15 years ago. Or, you know, maybe we have other things we know are coming up that should be reserve items. So these are the types of quicksands that most associations face. Now, the most common form of quicksand is simply not collecting reserves or enough reserves. Now these associations, of course, are stuck at the starting line. Board members failing to lead and provide the budget to care for the association, or listening too closely to homeowners who want their own way, or maybe the board wants it that way too, which means low assessments. This is the biggest trap that all communities fall into. Now remember that these are the same homeowners who signed on to join the association, meaning they bought a house, they were given the governing documents, and they actually are agreeing to be an equal partner in all the costs. So failing to collect reserves resents a double failure, where in the board is not doing its job to set the budget and collect necessary funds, and the homeowners aren’t doing their job providing the funds the association needs to survive. There’s a lot of denial going on in these type of situations. Now remember, it is not the board’s job to do the bidding of the homeowners. Homeowners don’t have the legal responsibility. They’re not a fiduciary to lead the association. The board does. Don’t forget, we are not a democracy in HOAs. We are a republic. So people are voted onto the board to make decisions on behalf of the corporation as a whole, not just for today, but into the future, which is, course, where reserves come in. Now, homeowners do not have that legal responsibility. Again, the board does. The homeowners are responsible for paying their fair share, everybody’s favorite saying their fair share of the association’s budgeted assessments. Another problem we see is associations continually focusing on having a, quote, comfortable amount of cash in reserves, that they focus on doing all they can to hold on to that cash, and often that amount of cash isn’t linked to the needs of the property defined in the reserve study. The problem here and in these type of situations, is that reserves are collected for one purpose, to be spent, not be hoarded. To be spent collecting reserves is not the goal. Caring for the property appropriately, is the goal. Now, a similar mindset mistake is seeing costs go up and feeling scarcity in the operating budget and spending reserves on operating expenses. This is a big no no, people. That’s another double, double failure, because the operating budget still doesn’t have the money it needs, and now the reserve fund doesn’t have the money it needs for the roof and the asphalt and the elevator and all those other reserve projects that need to be taken care of. Minimizing reserve funding is an interesting one we see way too often, where boards are nervous about collecting and sitting on a significant pile of cash. They think it could be misused, stolen or not sure how to keep it safe with bank failures and the ups and downs of the stock market, this is another thing we see all the time. Now let’s go to apathy. Apathy is a form of quicksand that means the board is acting, or even homeowners are acting like they just don’t care. Apathy is almost always more of a leadership problem than a reserve problem. It’s inaction for an action. Sake, I mean, you’re just stuck in that loop of not doing a thing. It means the board doesn’t appreciate that things are deteriorating every month and quickly, and they are gradually falling farther and farther behind on having enough money to even care for the property boards and managers stuck in apathy quicksand. Think the association will last forever. It’s been just fine. There’s no need to fix things, and someone in the future will take care of it. And what do I care? I will be dead and gone. It’s simply a lack of taking responsibility for the deterioration that’s occurring during your years leading the association. All why the association suffers additional deterioration and decline. Now, indecision. Now, indecision actually kind of looks like apathy, but it is a more hand wringing than just plain doesn’t care. Indecision means the board is typically aware of the problem, but stuck in the famous analysis paralysis, they’re not sure what to do to move forward correctly, afraid of getting it wrong, or often delaying decisions to a later time when they think they’ll magically have more information a day that never comes. Ever indecision happens when you’re trying to ring answers from an old meaning, five to 10 year old reserve study or one prepared in house. Reserve decisions are significant enough that you as board members should have an update prepared by a credential professional on the basis of a site inspection at least every third year. There are states in the US that actually require that nowadays, some even more, if you have a current credible reserve study and have a question, ask your provider, your research, your reserve study provider, that is, and they’ll give you the answer that you’re looking for, or that, wait a minute, not the answer you’re looking for, the the answer you want you need to hear, not what you want to hear, usually, it’s what you need to hear. Laughing at me, Robert, I

Robert Nordlund 11:55
heard it, and I just want to make a point clear that we’re sitting here at reserve state providers as reserve state providers, and we prepare the reserves day, and we are not bothered when the client calls or emails and says, Well, what do you think about this? That’s our job. So don’t be reluctant. Don’t get stuck in that indecision portion of quicksand, because I want to say it’s not your job to explain the nuances or read between the lines, just contact your reserve study provider and have them guide you through it. And while I’m talking, let me take the last step of quicksand there, and that’s all this unsureness, where what do we do? So your reserve study provider is guided by a three part test that defines what projects should and shouldn’t be funded through reserves. Appropriate projects are you see it on screen, common area maintenance obligations that can be reasonably anticipated and that are above a cost level that’s beyond what the operating budget can easily absorb. And if you’re again, ever unsure, just reach out to your reserve. Say provider. They’re the ones who are doing this all the time. They can guide you effectively. You’re not expected to have all the answers yourself. So rely on your experts when you’re not sure what to do. And let me take this one. This idea of fixating on a percent funded is a problem that Well, Julie introduced it a moment ago, where one type of quicksand was focusing on a certain reserve cash balance. And this is kind of similar, where we see boards stuck focusing on achieving a certain percent funded goal. And that’s nice, but it’s wrong. Your goal is to provide for the needs of the property, which is both collecting money and then spending money. Percent funded is a nice benchmark to let you know how well prepared your association is, but it’s not a goal in and of itself, so don’t let yourself get focused on that specific percent funded thinking you can relax when you get there, because percent funded is just a way of understanding how strong your reserve fund is you still need to execute those decisions and get projects done.

Julie Adamen 14:10
Now, as much as we describe the quicksand to avoid, we want to emphasize the goal to strive for success looks like having sufficient cash to perform your major repair and replacement projects on time, which is the board’s responsibility as fiduciaries or trustees in the process, you minimize expensive deferred maintenance, you avoid unfair special assessments, and you maximize property value. And I think we can all agree, those are really good things. Okay, now let’s switch gears to quickly let you know these types of quicksand, what we see is too many boards feel that they have somehow have the responsibility to do it themselves. Do everything themselves, but when it’s difficult or when you’re unsure, get help. You’re not Superman. Reach out to an experience. Experience Manager or your credential reserve study provider. Don’t struggle or flounder. There’s no reason for you to do so you’re just wasting valuable time while the situation gets worse. I mean, look at it this way, if you have something wrong with yourself, you go to a doctor. You try not to self diagnose. It’s probably better to go to a doctor. So that’s we want. Don’t want to waste time. Well, the situation gets worse. Now let’s talk about the business judgment rule. It’s how a board member behavior is measured all across the country. It’s how you do what you do as a board member. Now, you’re to act as if you care about the association. That’s the duty of care. It’s giving it the quality attention and services it deserves. And the next is to act loyally to the association, meaning you do what needs to be done, even if it will cost money or ruffle feathers. And the last is ask questions, meaning inquire when necessary. Inquire to your subject matter experts on what to do. That may mean asking your attorney how to manage a special assessment or an announcement and how to collect on a delinquent owner. Or ask your landscaper what plants will provide some color and thrive in your front entry. Or ask your reserve study provider why they used that cost for an upcoming roof project, ask questions, use experts. The duty of inquiry here, I want to make sure is, is the most important for all board members. I know your volunteers. Many of us have regular daytime jobs, and this takes time, but the duty of inquiry is the most important point getting help from professionals to avoid getting stuck in the reserve quicksand. Find out what to do. Remember everything at your association is getting a little older, like we all are, and more deteriorated and worn out each day. So reach out for help. It’s okay.

Robert Nordlund 16:54
Hey Julie. Let me talk through some of these slides. These are slides that they really speak to me, and I want to show these to the audience, and it’s a question of these are slides that show reserve expenses through the years. And we call them sometimes the fingerprints. But there’s different problems that associations face depending on the amount of cash they have, the types and sizes of expenses in the future, expectations for interest in inflation, things like that. But you look at this slide, it shows clearly a bunch of expenses through the years, but one big expense. So this is something that’s going to take years to prepare for, and the board needs to know how far away it is and how big it’s going to be. This is the same kind of thing, a bunch of expenses through the years, but at this association, their huge expense is just right around the corner. It’s, you can imagine, it’s pretty much too late for them to say, Oh gee, we need to start getting prepared. It would have been nicer if they would have spent 10 or 20 years getting ready for this expense. Or look at this one. It’s got scattered expenses through the years where some years are high, some years are low, nothing going on. And we can’t have a situation where the board’s new board gets elected like right out here, and they think, oh, there’s nothing going on. We’re all smooth sailing. Let’s lower the assessments or not raise them when they’ve got a big expense looming. So reserve site gives you the perspective to help you see what’s going on when it’s happening. Or what about this one, medium expense in a couple years, big expense in about the 10 year range, but a huge thing. This may be a siding or roofing or an asphalt project. It seems like a far ways out in the future, but if you’re just looking at these small expenses through the years, you’re going to get caught not prepared for this big guy that we can see. See this chart is from 2021 can see this 30 years out, we know there’s going to be this big expense, and I know, and you know, it may not be exactly this big and it may not be exactly this year, maybe a couple years earlier, maybe a couple years later, but there’s this huge expense out here, and it’s in everyone’s best interest that you get prepared as many years in advance as you can so you’re ready. So what we want to do is encourage you to be making a decision. Julie spoke about that in reaching out for help. When I look at this picture, I look at this and I see a fork in the road, am I going to go left, or am I going to go right? But look a little bit closer, and again, from The Wizard of Oz, you see the Scarecrow, and he’s pointing the right way forward. Too many boards are focusing on their decision, their potential choices, and not doing the simple and obvious. And that’s looking around and getting help. So we want to encourage you take action. After you’ve reached out for wise counsel, take action. The association needs you to lead. We’re talking about leadership here in this webinar, as much or. More than reserve studies. Don’t get stuck focusing on the choices and choices in front of you could do A or B or C, or more or less, or this or that, and you get stuck thinking about what an owner in one of the units you’re troubled and one has them for you. It might be the unit 13 a, what the owner in 13 A is going to say or do or think, do your job of leading the association forward. Owners have their responsibility to do their job, pay their fair share of assessments. Board members have their job, and that set the assessments needed for the association to survive and thrive.

Julie Adamen 20:40
Well, let’s talk a little bit about the elephant in the room. Owning real estate is expensive. Everyone listening to this must have figured that out by now, and associations need a lot of money to pay the daily and weekly and monthly bills and offset ongoing deterioration. So get used to the idea that it’s expensive. It is, and excuse me, to make those budgeted reserve transfers. It is, I’m sorry it is expensive. Excuse me, I had to sit in my throat. It’s either that or face deterioration and special assessments. Or if we go back to as Paige referred to earlier, the Champlain towers, I mean, it went back to the building collapsing pretty much so it really can have a very negative effect, not having taking care of things such as as Champlain powers did. But the honest truth is that reserve funding is usually about 25% of the association’s total budget. That’s a big number, but 25% of the total budget. Now think about that for your association, and see how much of your total budget you’re setting aside towards reserves. Reserve funding is often one of the association’s biggest budget line items, and compare what your association is doing to that 25% ballpark number, you 25% you 10% you 8% think about that. Take a look at them. But also getting out of the quicksand doesn’t have to be done all at once. I mean, doesn’t mean everyone has to have a ginormous special assessment. Make everybody really angry, and fund it all at once. Usually underfunded, underfunded associations have gotten themselves in that problem due to years, or more likely, decades of underfunding. So again, talk to your reserve study provider and work out a multi year plan to gradually get your association back on the trail or on the yellow brick road a few percentage points or even a few more dollars each year for a few years, is often what it takes to get an association back on track, back on that yellow brick road towards having enough money to care of itself. We’ve introduced types of quicksand. How to get out of the quicksand, and now we’re going to spend a few minutes on the topic of avoiding the quicksand altogether. And as you all out there, can imagine, it’s a matter of seeing the trail ahead, clearly your path clearly, and getting proper guidance. Fantastic.

Robert Nordlund 23:09
Thanks, Julie. Staying out of quicksand means understanding that mother nature and Father Time don’t take a day off. Every day your common areas are deteriorating, and every day, if you’re not offsetting that deterioration with properly sized reserve funding, you’re falling behind. Reserve funding is not about the future. Reserve funding is paying that ongoing bill of deterioration. So just like you pay the utility bill or management bill or insurance bill, the reserve bill, just like the sand in that hourglass is deterioration is happening and happening and happening every day. You need to pay those ongoing operational costs on an ongoing basis, and reserve funding is the same, just a little bit at a time, one month at a time, to offset deterioration. And as Julie said, it’s not a matter of winging it, not wringing your hands and stressing and indecision. There are experts out there. Rely on them. Rely on your experienced manager. Rely on your credentialed reserve study professional. That’s what they’re there to do, to help you move forward, staying safely and successfully on a trail to an improved future, and that also means following national best practices of updating your reserve study on the basis of a diligent site inspection at least every three years, you need fresh current information about where you are in the trail and what direction to go now, and even With that updated reserve study. Remember, when you have questions, reach out to your reserve study provider, get guidance, stay on the trail. Don’t guess. Remember that this is not a sign of weakness. And just like when Julie said earlier, when she was talking about the business judgment rule, reaching out for advice when you don’t know the right thing to do is your responsibility. It’s not a sign of weakness. Asking questions is appropriate behavior. Okay, well now let’s transition to the summary and bring this webinar to a close. The quicksand, the issue of distractions and complexities and obstacles and uncertainties, they’re all definitely out there. There’s nothing you can do about that. You are on a journey to the future. The sand is falling from the hourglass. You’re on the clock reserve funding is a time dependent problem, so delaying just makes the problems bigger. So lead the association forward. Remember it’s your job to lead as a homeowner’s job to pay their share of assessments, both sides need to do their job. Setting the budget. Is your job, paying their share of the assessments? Is their job? Think like a board member, not a homeowner. When you are a board member and fortunately, remember you’re not on your own, there are experts out there to help and guide you. Construction consultants are out there to help with the large roofing and painting and asphalt and elevator projects, reserves day providers are there to help you decide if something’s a reserve expense or an operating expense, what to do when something fails early or last longer than expected. You don’t have to wing it or figure it out all by yourself, there’s landmarks along the way. Percent funded tells you if your reserves are getting stronger or weaker. Special assessments are generally an indication that you failed to set aside enough funds in the past, and all of a sudden you need to collect more at this time to provide for the project and need to make budget adjustments in the future. And also remember, home values are always a nice indicator. See what you can do to make home values climb. Are you taking good care of the common areas, building things so they look nice? Or have those home values stalled for one reason or another. Look around, spread out the costs of living in the association and maintaining the association so that deterioration bill is paid a little bit at a time every month. Do what you can to make it an attractive place to live with maximized property values and follow your guides. While you may be the decision maker. There are plenty of people to guide you in the right direction, keeping you out of quicksand. I just want to show you where you can get some more information from Julie at admin inc.com Julie,

Julie Adamen 27:35
oh, Thanks, Robert. And this has been another great webinar to do with you. I just want to emphasize two board members out there. And I know this is probably the number one thing we hear as industry professionals. I’m in the management end and the consulting end. Robert, obviously, is the reserve study expert professional. But what do we always hear? We say, gosh, if we raise assessments to fund reserves, then Mrs. Smith, over at 123, happy lane is going to have to move because she’s on a fixed income. Now, if you’re a large Association, multiply that by 10 or 15 or 20, and boards often get stuck on that. Would you agree? Robert,

Robert Nordlund 28:11
absolutely. And that’s what I was trying to say a moment ago. Were boards thinking like homeowners and not like board members? Exactly. It’s

Julie Adamen 28:20
exactly right. And the thing is, truthfully, as sad as that is there, we’re all going to be in that boat eventually. Well, most of us are going to be somewhere in that where, no matter where we’re living, we may not be able to live there any longer, because perhaps we’ve become, you know, more feeble. Maybe we need more care, or maybe we just can’t afford our dues increases in a homeowners association because we are on a fixed income. I mean, that could be a very good fixed income, but you still may not be able to afford it, and this is just unfortunately, a cold, hard fact of life. And for board members out there, I applaud your empathy, but remember, you are trustees for the corporation, not for individual homeowners. And as trustees, as fiduciaries, it’s your job to understand that you have to make decisions based on the well being of the association, the corporation as a whole, not just as you know, oh my god, there’s five people who are going to be able to live here anymore. It’s just the truth. So don’t feel guilty about that. You have to make this happen for your people today, and again, for people that may be coming in, moving in 1015, years down the road. That’s your job as

Robert Nordlund 29:34
a fiduciary. Thanks, Julie. My side of that is that I think you’re doing a kind of thing if you’re gradually increasing assessments. And so people can see how the costs are increasing, and so they don’t get slapped with a big special assessment that all of a sudden, it forces a crisis at some point in time, in the future. And so the nice old lady in was it 123, happy lane, she can see it coming, and she can make. Arrangements before it gets painful. So keep that all in mind. Also, on behalf of association reserves, I want to thank you all for attending. We have a few more resources to help you stay out of quicksand. One is a book called Understanding reserves. It’s available on Amazon, and we’ll have a link to a free download of chapter one in the program outline, so make sure you fill out the end of session survey and you’ll get that link. Another is our free online reserve calculator called you plan it. It’s very useful for clients who get access free with their completed reserve study. It’s $399 a budget season for everyone else, but it’s a great way to be able to dive into your numbers and see what difference some adjustments make, maybe changing your starting balance, fiddling with interest or inflation, different costs or different timing, or maybe even a different funding plan. You can always go to YouTube to see more videos like this program. We have a deep library of video content on how to understand reserve concepts, communicate those concepts to the homeowners, or webinars like this, one leadership, how to lead your association successfully into the future. And for all you board members, we have a weekly 30 minute podcast designed to encourage and equip board members. It’s called HOA insights common sense or common areas. On that podcast, we have current news and insights. Julie and I are two of the regular co hosts of the program. We feature guest experts from different fields, and once a month, we feature a board hero, someone telling their story and all with the convenience of a podcast. So go to Hoainsights.org, or subscribe from your favorite podcast platform, and that brings us to the end of our prepared content today.