No Reserve Account - What Happens?

Often small homeowner associations make the mistake of not establishing a separate reserve account and fail to obtain reserve studies.

In California, associations that have common area are required to establish a separate reserve bank account and are required to obtain reserve studies at least every three years.

Homeowner associations that fail to open separate reserve bank accounts and fail to obtain reserve studies are in violation of California law. These associations open themselves up to being sued for negligence. In addition, mortgage lenders will often refuse to make loans to owners of units where the HOA has no reserve account and has not obtained a current reserve study. This can result in a lawsuit being filed by an owner against the HOA for damages resulting from their inability to sell or refinance their property without paying a premium. The lesson is clear. Boards should talk to their management company representative about opening a reserve bank account and scheduling a reserve study.

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Business Judgment Rule

Coast Management of California