Acting as a managing agent for many residential blocks, we’re well attuned to reserve funds and managing cost expectations for our clients. However, on occasions, we get asked about why and how can we make the most of the money in the pot?
Why are Reserve Funds so Important?
For most people that own a property, there are times when you wished you saved some extra money each month for when the washing machine unexpectedly goes on the blink! Particularly when you’re left with a hefty bill and debts to pay off to replace it.
It’s the same for when you are in a managed block. Unexpected expenses are no fun for anyone, which is why a ‘reserve fund’ is important for residential managed properties.
Planning ahead for regular maintenance or major expenditure that will be needed within the next 3-5 years ensures that monies are managed without the need to ask leaseholders to pay additional unforeseen costs. There should be no surprise bills given to you throughout the year if the reserve fund has enough money in there to pay the expenses when required. We’re not talking about putting money aside just for the sake of it, but a good managing agent will understand a realistic amount of financial security that you will require for the larger jobs.
For example, if your property is painted, it is often required in the lease to paint and repair the property in a certain time frame. Money for the scaffolding, labour and paint should have been collected throughout the previous years, so the lessees do not have to put extra money in on top of what they already contribute.
It also means that in a year’s time when you unexpectedly need to repair the lift, you may have to put an extra amount towards this, but you would have reduced the lump sum payment dramatically by contributing previously.
Without having this fund, it’s like a hidden time bomb! With any type of property, whether it is your own house, or managed flat, there are always going to be instances that no one can predict. By having a sinking fund, you will at least be in a better position to manage the budget accordingly and not cause difficulties for the residents of the property
Reserve funds can also take time to build – for new properties, or properties where agents have taken over accounts, there may be no ‘extra’ money collected each month. Rather than increase maintenance charges dramatically, reserve funds can be built up over time.
Can your residential service charge sinking funds be invested?
The answer from our perspective as managing agent is unfortunately no. As RICS registered Chartered Surveyors, we have to comply with RICS’ rules and regulations. This provides you with protection and assurance that the services provided meet strict codes of practice.
Whilst there is no legal requirement to stop management companies taking the sinking fund on themselves and investing the money into another high interest account, or bond – the management company (or persons) would no longer be protected by the RICS Client Money Protection Scheme and our Professional Indemnity Insurance as the funds are out of our control.
There is nothing to stop Directors of the management company taking control of the money directly, BUT, they would need to all have independent financial advice, there would need to be written agreements as to how to manage the money and finally; all risk and responsibility would lie with themselves, as the investment market can fluctuate. So there is a possible yes answer to the question, but not without stress and financial risk.
Reserve funds are generally overseen by the managing agent, as this takes away the risk from the Lessee’s and allows agents to effectively manage budgets. When reserve funds are done well, owners or properties should not have to pay out large sums of cash when things go wrong, only when planned maintenance is required. There should be a gradual flow of money into the account to allow for the future.
So, whilst you might like the sound of being able to invest your sinking funds into an alternative high yielding investment – unfortunately unless rules change, it’s best to keep it where it is and think about other ways to make interest on your hard-earned cash.
If you have any questions about your reserve fund, or you are looking to change your block managing agent, please call Watsons today on 01263 226500.
