Tag: fiduciary duty

Podcast Episode: Your HOA Is Losing You Thousands of Dollars Every Year — And Nobody Is Talking A

Pip: Welcome to The Hedge — where the tagline is "Brutal Honesty Over Hype Since 2008," and today that honesty comes with a calculator.

Mara: timothymccandless has been running those numbers on HOA reserve funds, and what he found is a gap between what homeowners' money is earning and what it could be earning — a gap that adds up to real dollars, every year, for millions of people.

Pip: Let's start with where that money is sitting and why nobody at your management company seems bothered about it.

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The Quiet Drain in Your HOA Reserve Fund

Mara: The central claim here is that HOA reserve funds — the accounts your monthly assessments feed into, meant to cover future major repairs — are being invested at rates far below what current law-compliant instruments are actually paying.

Pip: The post uses a real Southern California HOA as its example: 1,676 units, a reserve balance just over nine million dollars, and an assumed investment yield of 1.5 percent per year. The document states directly: "Reserve fund status: 74.35% funded — meaning the fund is already $3.1 million short of where it should be."

Mara: So the fund is already underwater, and the money that is in it is underperforming. At 4.5 percent — the rate available on FDIC-insured CDs, which California Civil Code §5510 explicitly permits — that same nine million dollars generates $409,028 a year instead of $90,145. The difference is $318,883 annually, or about $190 per homeowner, simply not being earned.

Pip: And the reason nobody fixed it is almost elegant in its simplicity: management companies are paid a flat fee regardless of yield. Whether your reserves earn one percent or five, their invoice is identical. No performance component, no penalty for leaving millions in what the post calls "what amounts to a passbook savings account."

Mara: There is a harder structural observation in the piece too. Large management companies place enormous combined deposit balances at specific banks — potentially hundreds of millions across their portfolios. The post notes that the compensation banks pay for delivering those deposits does not always flow back to the HOA. That relationship, when undisclosed, is worth questioning.

Pip: The board is not off the hook either, though the post is careful to call it usually an uninformed failure rather than a malicious one. Most board members are volunteers who see a 1.5 percent figure in a reserve study and assume the professionals handled it.

Mara: The post scales this out: 51,250 HOAs in California, an average reserve balance of two million dollars, a conservative 2.5 percent yield gap. The rough estimate is $2.5 billion per year in foregone interest income in California alone — and the national research firm Association Reserves found that 74 percent of HOAs nationally are currently underfunded, the highest rate ever recorded.

Pip: The fix the post describes is genuinely not complicated. Treasury bills are United States government obligations. CDs are FDIC-insured. Both are fully compliant with §5510. The industry has just successfully convinced boards that "safe" and "low yield" are the same thing.

Mara: The post gives four concrete steps any homeowner can take right now: ask in writing what the current yield is and when alternatives were last reviewed, read the reserve study's investment rate line, file a records request under Civil Code §5205, and talk to neighbors — because ten people asking the same question in one month moves boards in ways one person cannot.

Pip: The piece also announces the formation of the American Homeowners Protection Alliance, a California mutual benefit nonprofit aimed at organizing homeowners and pursuing accountability for management companies that underperform on reserve yield. The infrastructure for collective action, not just individual complaint.

Mara: And that collective framing is really the point — this is not one community's problem. The yield underperformance is baked into the industry's own reserve study assumptions because those assumptions reflect what management companies are actually delivering.

Pip: Which means the documentation of the problem is sitting right there in the annual budget report that was mailed to you, with a number on it that nobody explained.

Mara: The math is simple, the legal framework is clear, and the fiduciary obligations are established. What the post argues has been missing is someone willing to make it an issue.

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Pip: Fourteen million Californians paying into reserve funds that are already underfunded and earning below-market rates — and the fix is a phone call and a written question at a board meeting.

Mara: The fiduciary duty argument and the collective action framework are the ones to watch as this develops. More on the numbers as they emerge.

Your HOA Is Losing You Thousands of Dollars Every Year — And Nobody Is Talking About It

The Hedge | Brutal Honesty Over Hype Since 2008 By Timothy McCandless | May 29, 2026

I want to talk about something that affects 73.9 million Americans and costs them collectively billions of dollars every single year — and yet you have almost certainly never heard a word about it from your HOA board, your management company, or your real estate agent.

Your HOA is almost certainly sitting on a pile of your money — potentially millions of dollars — in a bank account earning somewhere between 1% and 1.5% per year while the United States Treasury is offering 4.25% to 5% on instruments that are literally backed by the full faith and credit of the federal government.

That gap — that quiet, unannounced, unacknowledged gap — is costing the average homeowner in a professionally managed HOA somewhere between $100 and $250 per year. Per unit. Every year. On top of every assessment increase you have absorbed.

And your management company is collecting full fees while it happens.

Let me show you exactly what I mean.

The Reserve Fund — What It Is and Why It Matters

Every California HOA is required by law to maintain a reserve fund. This is not optional. California Civil Code §5550 mandates it. The reserve fund is the money the association sets aside to pay for future major repairs and replacements — the roofs, the roads, the pools, the painting, the fencing — all the big-ticket items that wear out over time in any residential community.

Your monthly HOA assessment includes a reserve contribution. Every month you write that check or set up that auto-pay, a portion of it goes directly into the reserve fund. The idea is that over time the fund grows large enough to pay for major repairs without hitting members with a surprise special assessment.

A well-funded reserve fund protects your property value, keeps your community maintained, and prevents the financial disruption of a $3,000 emergency special assessment landing in your mailbox in January.

Here is the problem. Most reserve funds are not well funded. And one of the biggest reasons why is that the money sitting in them is earning almost nothing.

The Numbers That Should Make You Angry

Let me use a real example from a publicly available document — an annual budget report and reserve study recently distributed to members of a large Southern California HOA community consisting of 1,676 units.

The reserve study discloses the following on its face:

  • Reserve fund balance: $9,089,516
  • Assumed investment yield: 1.50% per year
  • Projected annual interest income: $90,145
  • Reserve fund status: 74.35% funded — meaning the fund is already $3.1 million short of where it should be

Now here is what the reserve study does not tell you.

Since mid-2023, U.S. Treasury bills — backed by the full faith and credit of the United States government, making them literally the safest investment on earth — have been yielding between 4.25% and 5.25% per year. FDIC-insured certificates of deposit at competitive banks have been yielding 4.5% to 5%. Government money market funds have been in the same range.

Every single one of these instruments is fully compliant with California Civil Code §5510, which governs where HOA reserve funds can be invested.

So what does 4.5% look like on $9,089,516 instead of 1.5%?

$409,028 per year instead of $90,145.

The difference — the money that is simply not being earned because someone decided to leave $9 million in what amounts to a passbook savings account — is $318,883 per year.

Divide that by 1,676 units and you get $190 per homeowner per year in foregone interest income. Every single year. On a fund that is already underfunded by $3.1 million and climbing.

Over four years — the period during which this rate environment has made yield underperformance professionally indefensible — the aggregate foregone interest income on this single reserve fund alone approaches $1.6 million.

That is not a rounding error. That is not an acceptable margin of professional judgment. That is a documented, quantifiable failure to perform a basic financial function.

Now multiply that number by the 51,250 homeowners associations in California alone.

Why Is This Happening?

This is the question I get asked every time I explain this to someone. The answer is uncomfortable but straightforward.

Professional HOA management companies have no financial incentive to optimize reserve yields.

Their fees are fixed. Whether the association’s reserves earn 1% or 5%, the management company gets paid the same. There is no performance component to HOA management fees. There is no bonus for delivering above-market investment returns. There is no penalty for leaving millions of dollars in a low-yield account for years on end.

In fact — and this is where it gets interesting — some management companies may have a positive financial incentive to avoid optimizing reserve yields. Here is why.

Large management companies that manage hundreds of associations place enormous aggregate deposit balances at specific banks. We are talking about potentially hundreds of millions of dollars in combined reserve and operating funds across an entire portfolio. Banks compete aggressively for those deposits. The compensation for delivering those deposits does not always flow to the HOA.

This is not an allegation against any specific company. It is a structural observation about the industry. When the entity responsible for placing your money has a financial relationship with the institution receiving your money — and that relationship is not disclosed to you — you should be asking questions.

The Board’s Role — And Where Things Break Down

Before you let your HOA board off the hook, understand their responsibility.

The Board of Directors of your HOA has a fiduciary duty to the members. That means they are legally obligated to act in your financial best interest in managing the association’s assets. When a reserve study lands on the board table showing a 1.50% assumed yield, and nobody on the board asks “why aren’t we earning more?” — something has gone wrong.

It is not always a malicious failure. It is usually an uninformed one. Most HOA board members are volunteers with no financial background who rely entirely on what the management company puts in front of them. They see a reserve study, they see the 1.50% assumption, and they assume the professionals have handled it correctly.

The standard of care for a professional HOA management company in 2026 requires, at minimum, an annual review of reserve investment yields and a presentation to the board of competitive alternatives when market rates materially exceed what the current accounts are earning. That review should be documented. Those alternatives should be in writing. The board should be making an informed choice — not inheriting a default that nobody questioned.

This Is Not One Community’s Problem — It Is an Industry Problem

The example above is not an outlier. It is representative.

There are approximately 51,250 homeowners associations in California. Nationally there are about 369,000. Industry-wide, reserve study firms use investment rate assumptions of 1% to 3% as their standard baseline — because that is what professional management companies are actually delivering. It is a self-reinforcing cycle of low expectations baked into the industry’s own documentation.

The national research firm Association Reserves analyzed over 100,000 reserve studies and found that 74% of HOAs in the United States are currently underfunded. That is the highest underfunding rate ever recorded. Investment yield underperformance is a significant contributing factor.

Do the rough math on California alone. 51,250 associations. Average reserve balance of $2 million. A conservative 2.5% yield gap. That is $2.5 billion per year in foregone interest income flowing out of California homeowners’ reserve accounts — money that should be reducing assessment increases, closing reserve funding gaps, and protecting property values.

Instead it simply disappears into the gap between what is being earned and what could be earned with a phone call to a Treasury direct account or a properly structured CD ladder.

What California Law Actually Says

Here is what the industry does not want you to focus on.

California Civil Code §5510 says HOA reserves must be invested in FDIC-insured accounts or United States government obligations.

That is it. That is the constraint.

It does not say the yield must be low. It does not say that safety requires sacrifice. It does not say that a passbook savings account at whatever bank the management company prefers is the only option.

U.S. Treasury bills are United States government obligations. They are fully compliant with §5510. They currently yield 4.25% to 5%.

FDIC-insured CDs are FDIC-insured accounts. They are fully compliant with §5510. They currently yield 4.5% to 5%.

The management industry has successfully conflated the concept of “safe” with “low yield” in the minds of HOA boards for decades. In the current rate environment, that conflation is not just wrong — it is expensive, and it has a cost that shows up directly in your monthly assessment.

What You Can Do Right Now

If you live in an HOA — any HOA, anywhere in California — here are four things you can do immediately.

One: Ask the question. At the next board meeting or in writing to the management company, ask: “What financial institution holds our reserve funds, what is the current yield on those accounts, and when was the last time the board was presented with competitive yield alternatives?” You have a right to this information. Ask it in writing and request a written response.

Two: Read your reserve study. It was mailed to you with your annual budget report. Look for the “Global Parameters” or “Investment Rate” line. If it shows 1.5% or less, you now know what that means in dollar terms.

Three: Make a records request. California Civil Code §5205 gives every HOA member the right to inspect the association’s financial records, including bank account statements showing actual yields. No lawsuit required. Written demand. Ten business days. Up to $500 per violation if they refuse.

Four: Talk to your neighbors. This is a collective problem with a collective solution. If the board hears from ten homeowners asking the same question in the same month, something gets done. If one person asks, it gets buried in the next agenda packet.

What Comes Next

I have spent the past several months documenting this issue, analyzing reserve study data, quantifying the yield gaps, and building the infrastructure to address it at scale.

The numbers are clear. The legal framework is clear. The fiduciary obligations are clear.

I am in the process of forming the American Homeowners Protection Alliance — a California mutual benefit nonprofit corporation — whose purpose is to organize homeowners, support collective legal action, and pursue accountability for HOA management companies that fail to prudently manage the reserve funds their members pay into every single month.

If you live in a professionally managed HOA in California and you want to know whether your reserve fund is being managed at market rates, or you want to be part of what comes next, contact me through this site.

This is a $2.5 billion problem in California alone. It affects 14 million people. The math is simple. The fix is simple. The only thing that has been missing is someone willing to make it an issue.

Consider it an issue.

Timothy McCandless is the founder of the American Homeowners Protection Alliance and the author of The Hedge financial blog. He has been writing about financial markets, real estate, and consumer financial issues since 2008. He owns property in a Southern California HOA community and is an active dues-paying member. Nothing in this article constitutes legal advice. If you have specific questions about your HOA’s reserve fund management, consult a licensed California attorney.

The Hedge — Brutal Honesty Over Hype Since 2008 timothymccandless.wordpress.com

Tags: HOA, Reserve Fund, Homeowners Association, California Civil Code 5510, HOA Reform, Property Management, Investment Yield, Davis-Stirling, American Homeowners Protection Alliance, Fiduciary Duty, HOA Assessment, California HOA Law

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