Your HOA reserve studies are planning reports used to manage and assess the current status of your associations’ reserve accounts. The study results can then be used to create a plan to build the funds for later use.
Your community associations’ reserve studies can supply a concrete basis for how your HOAs should budget their finances. To help grow your communities, hire a reputable reserve specialist who works closely with a structural engineer, and knows what to include in the studies. Even if your state does not have reserve requirements, you should have them performed every few years.
Reserve funds are rainy-day funds for HOAs. Your associations’ financial health can be found by examining the fund’s strength through a reserve study.
Reserve studies seek to evaluate each significant capital component in the association, determine the life left in each, and how much it will cost to replace it when it wears out. From that evaluation, your team can calculate how much is required to be set aside annually.
To calculate those fund amounts, specialists take the approximate replacement cost and divide that number by the estimated amount of years the item will last. That is how much the association should set aside each year.
Capital components include each common area the HOA is accountable for including:
The results should provide a real-world estimate for future repairs or maintenance. To illustrate, if a community center’s roof is designed to last 20 years and it is 10 years old, it is considered 100% funded if your HOA has one-half of its replacement cost in its reserve fund. Fifty percent is the amount of roof life that has been used up. Your association’s consultant or structural engineer would need to repeat this process for each component.
Once the process is repeated, and your HOA discovers it has reached the necessary funding each time, the HOA’s reserve account is considered 100% funded.
The goal is to have that amount funded through homeowners’ fees as close to 100% as possible. Reserve funds that have reached 70% are in reasonable shape; however, anything beneath 50% is unacceptable.
One reason for this is that if a project comes up for completion and the reserve funds fall short, the board will have to increase assessments to cover the costs. Increased fees can foster community mistrust and can damage relationships.
Some HOAs seek to charge lower fees to reduce the risk of aggravating residents; however, they probably will not be able to build their reserve fund that way. Often, this is indicative of an unsound HOA management strategy that will subsequently hurt the association if an unexpected capital improvement is required.
A successful reserve study underpins a solid budget, which strengthens the association’s financial health and helps homeowners and board members enjoy an equitable relationship.