Are you planning to do an HOA reserve study? Wondering how to conduct one so you don't get into trouble?
Every good homeowner association ensures:
- Well-maintained amenities and facilities for the community
- Good property values, and most importantly
- Peace of mind of their homeowners
These outcomes are only possible when you run your HOA professionally and take certain actions with a far-sighted vision. One of the most important such actions is the HOA reserve study.
Below you'll learn everything related to a reserve study in this article. What is it, why is it important, when should you do it, and how.
What is Reserve Study for HOA?
Each HOA annual budget includes actionable for both short-term and long-term financial planning.
For example, an operating fund is part of an HOAs short-term financial planning and is created to take care of an HOA’s day-to-day expenses. The operating fund may include things like taking care of the monthly vendor expenses, regular maintenance expenses, etc.
Reserve study on the other hand is a long-term financial budget planning tool for an HOA and its main goals include:
- Assessing the fiscal health of an organization
- Analyzing the health of an HOA’s physical properties
- Projection of a financial roadmap for the association
- Determining the reserve that must be maintained for any sizeable expenses in the HOA, so the HOA can break it down in the form of monthly fees.
As a result, it includes both physical and financial analysis of the HOA and must be conducted by all associations that are serious about the overall health of their community.
What is the Purpose of a Reserve Study?
Not in all, but in select states, a reserve study must be conducted by law. These states also tell you how frequently such a study is required. So, for HOAs in these states, this becomes the primary purpose of a reserve study, and these states are:
- Virginia, and
However, there is much more purpose to a reserve study than just statutory duty, and the primary one is the peace of mind of your homeowners.
Imagine your clubhouse needs a major overhaul, or your community needs a swimming pool for summer. These are big expenses, and if you have not done a reserve study and accounted for them in your annual budget, your only choice is to charge your residents a handsome special assessment.
A family with pre-determined responsibilities and a limited budget is going to be very frustrated with such an assessment. Even if they arrange the money somehow, they are going to give out bad reviews about the HOA to their friends and family and a couple of such families is equal to poor real estate value over a period of time.
So, one of the key purposes of a reserve study is to avoid such situations and keep the property values at par with the market, by avoiding to inconvenience its residents with such fees.
Now, we can also flip this and see it from the HOA point of view which has the responsibility of keeping the HOA from financial stress. At the same time, they have to maintain the community assets at a certain level and also build new ones. To do both these things smoothly, maintaining a reserve is the best option, and hence the reserve study.
Last but not the least, your association may need to take loans sometimes and lenders mostly use a reserve study to judge the financial health of your association. And that is another reason for you to do a reserve study and maintain a healthy reserve fund.
Types of Reserve Study and when they should be Conducted
As per the requirements and purpose at a given time, an HOA reserve study can be of different types. I am going to discuss the main 4 types of reserve studies here.
Preliminary reserve study – It is called preliminary because this study is for estimating the budget even before the community is constructed. A preliminary study is based on architectural and engineering documents and plans. It includes:
- Component inventory
- Funding plan
- Life estimates
- Valuation estimates
Full reserve study – This is a one-time study that usually happens at the beginning of the formation of the HOA. If a new board takes over and has any doubts about the study done by the previous board, they may decide to conduct a second study.
However, the need for a second study must be carefully considered, as it is very detailed, time-consuming, and expensive. It also involves a full inspection of the site and measurement of common areas. A full reserve study also includes developing life and valuation estimates, fund status, and a funding plan.
Study with an on-site visit – This type of study is a revision of the original reserve study as required. So, naturally, it is less expensive and time-consuming and includes the update / verification of the component list. Depending on what state you live in and your HOA requirements, you may conduct this study every 3 to 5 years.
This study includes a condition assessment that is based on-site inspection and an update or review of life and valuation estimates, fund status, and a funding plan.
Study without an on-site visit
During the years when there is no on-site reserve study, a simpler version without an on-site visit is conducted. It is naturally much cheaper as the component information is only updated based on observations and discussions with the HOA board, maintenance staff, and vendors.
The same goes for updating life and valuation estimates, fund status, and funding plans.
When should you do a Reserve Study?
Different states have different guidelines about the time period in which a reserve study must be conducted.
However, a yearly reserve study will prepare you in advance against any surprise special assessments by determining how long your assets have left and how much it will cost to replace or repair them.
Also, you can never look at just a number in your books and say that your reserve is adequately funded. Because even if the amount looks handsome, your association may have pending projects that require money beyond what you see.
On the flip side, it may also happen that the reserve fund looks depleted, but there are no pending projects and you can do with what you have.
Therefore, a regular annual reserve study is highly recommended.
Who is Responsible for Conducting the Reserve Study?
It is the main responsibility of the treasurer to ensure that the association periodically conducts a reserve study and he typically asks the HOA management company to do it.
However, a reserve study is a highly specialized task, and even the HOA management company will hire a certified Reserve Specialist from the Community Associations Institute (CAI). Contacting an expert through the Association of Professional Reserve Analysts is another option.
Here are some points to remember to make sure that you are hiring the right reserve study company or expert:
Word of mouth counts – You can ask the board members of other HOA communities to get the most reliable expert for your study. This will make you less dependent on a meager sales pitch, and instead, you can work with someone who comes highly recommended for the job that you are looking for them to do.
Experience means a LOT – Even if someone comes highly recommended, check the necessary indicators of a good company from your side. Experience in dealing with different types of properties and studies is a big one.
Past success, qualification, and experience together, can mean a powerful combination of a company/ individual who will draw a robust financial plan for your HOA.
Local expertise may come in handy – Homeowner associations are subject to state laws, and therefore hiring a local expert means he is already familiar with the statutory requirements of a given state. So, while you select an expert this is one point worth keeping in mind.
HOA Reserve Study Cost
As I briefly discussed in the types of studies, the cost of the study depends on its type and many other factors. A full reserve study costs a lot for example, and a reserve study with no site visit costs the least.
Some common factors that influence the cost of the study are:
- Property size
- Location of Property
- The complexity of common elements
- Time of study
- How soon the study is required, etc.
So, depending on the type of study, the cost of a reserve study can change dramatically and can be anywhere between USD $500 to USD $5000 and more. A simple understanding is that the more complex the study, the higher it will cost you.
The most important thing to note here is that you must hire a professional irrespective of the high cost. Because it may seem tempting to attempt a study yourself, it can cost your community and you dearly to take this study lightly. A reserve study has clearly everything to do with your association’s financial health and its future.
How to Prepare an HOA Reserve Study?
Although you will be hiring a reserve expert, you must know the basics of how it is done to have a better awareness of how it is going when you conduct a reserve study. So, let me talk about the standard steps to a reserve study:
- A review of HOA’s key documents is usually the first step of a reserve study. These documents include a community blueprint, governing documents, HOA meeting minutes, etc.
- The next step is to review the financial information of the HOA including monthly income from the members and all expenses including reserve account and operating expenses. Now, the reserve expert may decide to create a buffer around operating expenses, by escalating them at a certain percentage.
- The expert will also make a list of the HOA assets with their expected lifespan, the remaining useful life, and the current replacement cost of all the major areas of the association funded through reserves.
The component analysis is an important part of the process at this step. Site inspection is conducted by the reserve expert to prepare an accurate list of all components.
According to the Community Associations Institute (CAI), a component is “the individual line items in the reserve study, developed or updated in the physical analysis … these elements form the building blocks for the reserve study and … comprise the common elements of the community.”
A few examples of the components in the analysis are roof replacement, asphalt overlay/ seal coat, replacement of fencing, pool re-plastering, replacement of siding, replacement of lighting, etc.
- Then he will analyze the net operating reserve accounts of the HOA to see if the current balances support all of the day-to-day operations, as well as the long-term reserve costs. If they don’t, then the HOA has a few options:
- To raise the dues by 3-5% to fix the deficit if that helps.
- To implement special assessment which in all possibility means each homeowner paying thousands of dollars to recover the deficit. However, please do remember that it comes at its own cost of residents losing faith in the HOA and eventual poor property values.
- Taking loans can be the only possible way to avoid special assessments if the deficit is a big one. And however, you will save face in front of the members, the fact is you will still be paying interest to the bank and adjusting it in monthly revenue. A timely reserve study can help you avoid both taking loans and implementing huge special assessments on HOA residents.
The expert will also make sure that he meets all the statutory requirements while conducting this study.
I hope that by the end of this article, you have a fair understanding of why a reserve study is so important and how to conduct one for the overall health of your HOA and your community.