Financial stability in a homeowners association (HOA) is vital. Outside of daily operating costs, the association must also take into account future expenses. Roofs typically last 25-30 years or longer, but eventually, they will need to be replaced. How will the association pay for this? That is where reserve funds come into play.
Reserve funds are where the HOA puts away money to pay for big expenditures. A portion of every homeowner’s fees are directed to this fund so that it continues to grow and can cover the costs of repairing or replacing major assets. A fully funded reserve can reduce the risk of special assessments. But how does the HOA know how much it needs to put into the reserve fund? By conducting a reserve study.
What is a reserve study?
A reserve study is an evaluation and analysis of all of the association’s assets. It looks at the physical condition and life expectancy of various equipment and amenities such as roofs, swimming pools, playgrounds, clubhouses, parking areas, HVAC systems, sidewalks, and more. The study details the expected and remaining lifespan of assets, and how much replacement is anticipated to cost given the current market. In addition, it examines the financial health of the HOA such as revenue, expenses, and existing savings.
How do HOAs use reserve studies?
The findings of the reserve study are used to help the HOA plan and save for the future. For instance, if the clubhouse roof will need to be replaced in 10 years, and it is estimated to cost $30,000, the HOA should be putting at least $3,000 per year into the reserve fund to save for this expense. The same goes for all of the other assets listed. Based on current revenue, the association can decide if it needs to increase fees or look for opportunities to reduce costs elsewhere in the budget to generate savings.
Are reserve studies required?
Some states mandate that HOAs conduct comprehensive reserve studies every three years and update the study annually. Other states do not have this requirement. In either case, it is in the HOA’s best interest to complete regular reserve studies so that it can protect the financial health of the association and prepare for major expenses.
Who conducts a reserve study?
Technically, anyone could do a reserve study if they understand what they are looking for and how to analyze costs. However, it’s often better left to a professional reserve specialist who can ensure an accurate report and knows the ins and outs of the process. Reserve studies can cost anywhere from a few hundred to a few thousand dollars, so the HOA should do its research, ask questions, and know exactly what it is paying for. The cheapest option (or most expensive) is not always the best option.
Once the HOA has its completed reserve study in hand, it’s time to apply that information to making changes in the association. This can seem like a daunting process, but working with a property management company like Kuester can make it easier. We’ll help you better understand your reserve study and what it means for the financial health and future of your HOA. Contact us today to learn more about how we can help.