As a board member, you’re responsible for maintaining the financial health of your association. Key components of this task include creating a reserve fund and conducting regular reserve studies.
A reserve fund is money set aside by a community association for additions to major components the association is obligated to maintain and future replacements and repairs that don't occur on an annual basis. The issue is that some studies say nearly 70% of HOAs in the United States have underfunded reserves. To determine how much money your association should have in its reserve fund and ensure you’ll have enough money for a repair or replacement, a reserve study will need to be performed.
What is a reserve study?
A reserve study looks at the property and reserve account and analyzes all foreseeable capital improvements and repairs. For example, if your community has a clubhouse with a roof that needs to be replaced every ten years, the reserve study will advise how much and how quickly your association needs to save to make the repair at the appropriate time.
Typical reserve studies are comprised of two parts, the physical analysis and the financial analysis:
- Physical Analysis: Evaluates the physical status of the association and estimates the repair and replacement costs of the major common area components.
- Financial Analysis: Assesses the current reserve fund status and recommends an appropriate reserve contribution rate.
Who can perform a reserve study?
Because reserve studies are so involved, associations should hire a qualified and experienced Reserve Specialist or Reserve Analyst to perform a reserve study. The Community Associations Institute offers a professional Reserve Specialist® (RS®) designation, but every state and community is different, so always check your governing documents and state regulations for additional requirements.
What happens during a reserve study?
A reserve study is a lengthy process with a lot of moving parts. During a full reserve study, the following tasks will be completed:
- Component inventory
- Condition assessment based on visual observations
- Life and valuation estimates
- Fund status
- Funding plan
Full reserve studies are the most comprehensive and expensive type of reserve study—but they typically only need to occur once unless you’re looking for a second opinion. If your association previously conducted a full reserve study, you may have the option to get a less-detailed, more affordable type of reserve study that can be done with or without a site visit in the subsequent years.
How much does a reserve study cost?
The cost of a reserve study varies with the size, complexity, and location of your community. The cost for conducting a first-time reserve study for a small HOA can start at $2,400, but the price of a first-time reserve study will likely differ from that of a subsequent reserve study.
How often does my association need a reserve study?
The frequency of a reserve study depends on your association's governing documents and local and state laws. For example, Virginia requires a reserve study to be completed every five years, while California requires one every three years.
Check your association rules and state laws to ensure reserve studies are being completed within the proper time frame. While you may live in a place without guidelines, regularly conducting a reserve study ensures your assessments are consistently bringing in enough capital, your major components are properly maintained, and your risk of underfunded reserves is much lower. Do what makes the most sense for your community and work with a trusted community manager to implement a reserve study schedule.
What are the benefits of a reserve study?
Even if your association isn’t required to perform a reserve study, it’s a good idea to get one. Here are a few reasons why your association should get a reserve study:
- Minimize the possibility of special assessments or loans
- Demonstrate good financial stewardship to residents
- Simplify annual budgeting processes
- Fulfill legal requirements
- Better plan for property repairs and replacements
- Enhance property values
- Easily accommodate and schedule future capital projects and costs
- More accurate review of future vendor bids
Webinar: What You Need to Know About Reserve Funds & Studies
To learn more about HOA reserve funds and studies, check out our webinar, “What You Need to Know About Reserve Funds & Studies.” In it, we break down commonly asked questions and provide helpful tips and insight from experts.