What is the Purpose of a Reserve Study?
A HOA/Condo board runs its finances in much the same manner as you probably do for your own family: a checking account funds the ongoing, predicted monthly expenses, while a savings account covers unexpected expenses or future repairs and replacements.
For HOAs and Condo Associations, that savings account is called a reserve fund. And the careful monitoring of – and strategic planning for – use of the reserve fund is called a reserve study. A reserve study is an essential long-term capital budget planning tool for any thriving community. It enables HOAs and Condos to create a plan for funding ongoing deterioration, future repairs and replacements.
According to WPM Community Manager Troy Painter, “the reserve study provides a guideline for managing projects for your community association. It tracks the existing life of major shared investments, such as roads or roofs, so that when something needs to be repaired or replaced, the HOA is prepared and has the funds ready to meet that need.”
Painter cautions that it’s not enough to simply conduct the study and then put it on the shelf. “It should be a roadmap that boards consult quarterly to understand what projects are happening and to plan accordingly.”
The reserve study is also intended to be a flexible guideline that informs, rather than a rigid law that mandates. For example, if a capital expense is planned for the current year, but an inspection reveals that the equipment to be replaced has several more years of usable life, boards can opt to delay replacement in favor of prioritizing other expenditures for that year.
A reserve study offers homeowners another important benefit: HOAs and Condo’s are less likely to require special assessments if they routinely conduct a reserve study.
“If you plan properly, you can often avoid collecting special assessments,” explains Painter. “Obviously emergencies happen and unexpected expenses may arise. But the goal is for the reserve study to predict what will need to be replaced and to maintain adequate cash reserves. That’s important, because the more special assessments a community collects, the more likely it becomes for delinquency to increase. Most homeowners can budget for their annual HOA/Condo fee. But an unexpected special assessment is beyond the reach of some homeowners. Careful review and planning by the Board/Management team of the reserve needs goes a long way towards sound fiscal management and avoiding special assessments.”
When a board regularly conducts a reserve study, it’s indicative of the overall health of the Association. Properties are maintained on schedule. Residents are not burdened with unexpected expenses. And boards can devote their time to helping their communities thrive.Filed Under: Associations, General, Maintenance