Reserve Planning for Homeowner Association Boards
Reserve studies are necessary for effective community management. A reserve study evaluates the association’s major components, their lifespans, and the costs of replacement and repair. The study also establishes a multi-year plan for funding which determines how much funding is needed and that each owner is paying a fair share. The study also establishes the timeline, specifications, and distribution of funds for capital improvements. Elite Management Services can help your association be prepared for the future, contact us today for more information.
Reserve Study Q&A:
What is a reserve study and how can it help a homeowner association better manage its funds and maintenance?
In order to properly analyze an association’s assets, there are several components to a reserve study. The first step of any study is to identify all major association maintained amenities. From there, it must be determined what the cost of repair or replacement will be, as provided by a construction estimate or contractor bid. Finally the remaining life of each item is established. Once these three components are found, a financial plan can be set. For example, if the resurfacing of an Olympic size pool costs $50,000 and current surface has six years remaining in its useful life, $8,340 will needed to be collected every year in order to pay for the project when it’s required. This procedure is repeated for each of the community’s assets to calculate how much money is needed for the reserve fund and when. The reserve fund will need to be adjusted every year to account for inflation and accumulated interest on the fund. In addition, the assets should be inspected every three years to reevaluate how much time is left in their lifespan and contractor’s bids should be again obtained to adjust for industry changes.
Should the association have inadequate funds, the financial plan may provide a way to replenish them. However it is funded, the goal should always be “100% funding” to ensure the association will have the money on hand when it is needed.
How should these reserve funds be accounted for?
Like with money market and savings accounts, reserve funds should be kept separate from standard operating funds. This ensures funds are spent appropriately, but also because proper investment of funds can reduce the amount of money that needs to be collected from owners. Long term investments can often be purchased instead of a standard savings account as they have higher return. Recommended investments include certificates of deposit (CDs) or government securities.
When should a reserve study be performed?
Every homeowners association needs to have a reserve study completed. From there, annual updates are inexpensive and are a matter of reevaluating the fund and assets.
What financial problems can homeowner associations encounter with inadequate reserve funds?
Special assessments are the only way to raise funds should a reserve be underfunded. These special assessments are often universally unpopular as they do not require the input of homeowners, several associations tend to delay major projects. Postponing repair or replacement means the condition of the asset deteriorates. This causes a higher price for the project itself and lower curb appeal and home resale value.
Can poorly managed reserve funds affect the sale of units?
Yes, as the reserve fund – or lack thereof – is a sign of an association’s financial health and history. Buyers and lenders can often be put off by the lack of a reserve fund. Not having a reserve means special assessments will be inevitable, and the association may have a history of irresponsible spending.
Which types of major repairs must be paid for by association funds?
Each association’s documents includes verbiage on what maintenance issues they are responsible for. Condominiums tend to have the most responsibilities, including roofs, painting, landscaping, clubhouses, sidewalks, and so forth.
How much does a reserve study cost?
Reserve study costs depend on the type and size of the association, as well as the number of amenities. But no matter the cost it is worth the peace of mind you receive from the study.