A reserve study is a long-term budget-planning tool designed to identify the current status of an association’s reserve fund, which offsets the association’s ongoing disrepair and future costs.
A reserve study has two parts:
The Physical Analysis is an evaluation of the physical state and repair or replacement costs of common area components that an HOA is obligated to maintain.
The Financial Analysis is an evaluation of the association’s income, expenses, and reserve balance.
The Physical Analysis and Financial Analysis help predict the projected reserve income and expenses. Using these analyses, the board can strategically plan for future expenses and incorporate any special assessments and budgeting.
Why Does an Association Need a Reserve Study?
First off, reserve studies are vital because they create equality between the current and future members of an association. For example, if the current members of an association are using the HOA’s physical resources, such as the clubhouse or a pool, they are creating wear and tear on that property. Eventually, in 10 or 15 years, something will happen – i.e., a roof will need replacing or a leak will occur. If there is no reserve, or if that reserve is inadequate, the future members would then be responsible for financing all, or a large portion of, damage they did not personally cause.
Another reason reserve studies are so important is because careful planning mitigates financial emergencies. When that large expense finally hits, the HOA will have planned accordingly, and will not need to secure special financing to fix the problem. Ultimately, a little financial pain up front translates into fewer costs down the road.
One of the chief responsibilities of a board is to ensure the finances of an HOA are in order, including future expenses. A reserve study is an easy tool you can use to maintain the financial health of your association.
How Much Does a Reserve Study Cost?
The cost of a reserve study will vary by association depending on its size, amenities, the complexity of its structures, etc. Usually, these studies will range from a few thousand dollars to around ten thousand dollars. An average estimated cost would be about 1% of your association’s budget; however, that number will not scale well for large or small associations. While reserve studies can be costly, obtaining a detailed study is crucial for ensuring the financial health of the HOA.
Types of Reserve Studies
There are several types of reserve studies. A full-scale, comprehensive reserve study needs to be done at least once (this will be the most expensive type). After that, your association should plan on having a with-site-visit reserve study done every three years and a no-site-visit study done yearly.
This may seem like an excessive (and expensive!) policy, but please remember that if you are budgeting correctly, your reserves will comprise about 15% to 40% of your total budget. Such a large line item needs to stay updated on a yearly basis. Most board members don’t realize that reserve study results technically expire after a year. An unexpected economic change or a natural disaster, for example, can radically change your association’s reserve outlook!
Who Conducts Reserve Studies?
When it’s time to conduct a reserve study, be sure to hire a proven expert who can conduct a custom reserve study especially for your HOA. Reserve study professionals, called reserve analysts, often hold industry accreditation based on experience and education in this field, and they can provide confidence and peace of mind to your board.
Because obtaining and reviewing a reserve study takes about two to three months, it’s important to involve your community manager if you have one—they’ll know exactly where to go and how to find the reserve analyst that’s the best fit for your association and can assist in managing the reserve study process.
Organizing and conducting a reserve study is a necessary task to ensure your HOA’s reserve funds are sufficient. Once you have a plan in place for long-term capital improvements, budgeting becomes easier and relations between board members and homeowners will improve because reserve studies help alleviate the need for special assessments.
Ultimately, keeping your reserve study up-to-date is a crucial part of successful association management.