One major part of budgeting for your homeowners association is building an adequate reserve fund. Not having enough in your reserves can be disastrous for your community if a major expense comes up. The expenses will then have to be covered by more extraneous means, like a special assessment or a loan.
To make sure you’re creating the best reserve fund possible for your association, you should hire a third party professional to conduct a reserve study.
What Is a Reserve Study?
A Reserve Study is a long-term schedule of potentially expected or common repairs or improvements associations generally face. Additionally, it’s a budget-planning tool used to determine the status of your reserve fund, and whether that fund can cover your association’s ongoing and future costs. The study is split into two parts: a financial analysis and a physical analysis.
The Financial Analysis is an assessment of your HOA’s income, expenses, and reserve balance.
The Physical Analysis is an appraisal of your community’s physical state, as well as past (and potential future) repair or replacement costs of your common areas.
Together, these analyses forecast the likely income and expenses for your reserve fund. Your HOA board can use this information to map out future expenditures and avoid underfunded situations.
Why You Need a Reserve Study
It’s pretty common knowledge among most HOA property owners and managers that a reserve fund helps prevent financial catastrophe, and a reserve study is a great way to properly plan your reserves. But there are a few other reasons you should conduct a study.
Reserve studies guarantee equal opportunities of common area use for all members of the HOA, no matter when they live in the community. When your neighborhood is first built, your amenities and common areas are brand new and fresh for your residents. As time goes on, wear and tear can diminish the quality of these amenities, meaning new residents who move in 15 or 20 years later are not offered the same facilities. This can tend to cause dissatisfaction among residents, particularly as HOA dues and fees increase over time. These newer residents are also not likely to be happy about any special assessments that require them to pay for repairs due to damage or deterioration they did not help cause.
As we mentioned before, a sufficiently large reserve will ensure that any major financial emergencies are covered. This also means that your association will not be forced to take out loans or seek special financing, which can be costly to repay. It’s the job of the HOA board to properly manage the budget and ensure future expenses will be covered.
How Much Will a Reserve Study Cost?
This will depend on several factors: the size of your community, the amenities available, and the type of study conducted.
In most cases, reserve studies will cost anywhere between two or three thousand dollars up to ten thousand dollars. On average, you can predict the cost will be around a percent of your budget, but this does not necessarily hold true for smaller communities or very large ones.
Types of Reserve Studies
The cost of the study will also be determined by the type conducted. You can order one that is extensive and comprehensive, and conducted on site—this should be done at least once in the lifetime of your association. Other, smaller studies are available and more affordable, including small-scale, off-site studies. It’s recommended that you conduct an onsite study of medium scale about once every three to five years, and an offsite study done every one to two, depending on the size of your association and budget.
While an annual offsite study may seem too often (especially with the cost), keep in mind that your reserves are anywhere from 15-40% of your budget. Regular evaluations are wise when dealing with such a large portion of your HOA’s money. Most reserve studies actually expire—usually after one year. A lot can happen within a year that could drastically alter your community’s future financial health.
Hire a Professional to Conduct Your Reserve Study
Reserve study professionals, also known as reserve analysts, accumulate experience and learning in order to gain certain licenses and certifications from the industry. Their expertise is conducting these financial analyses, and you are much more likely to attain accurate and helpful information from a professional study than from attempting to do one in house.
Your community manager can help you find the right analyst for your community’s needs. These studies typically take around 2 or 3 months to complete, and are imperative to ensuring your reserve funds are adequate for your association. A solid, well-researched plan for large-scale projects over time will help make budgeting easier, and build and maintain trust and confidence between you and your residents.
Have more questions about reserve studies, or looking for assistance in selecting a reserve analyst? Read more about HOA financial topics, or contact us and we’ll be happy to help!