This article is the second in a series on reserve studies. Last week, we addressed the importance of getting a reserve study done. This week, we’re going to discuss how to make the most of it. Spectrum Association Management always encourages associations to live below their means, but we recognize that preparing for future costs can be complex. Your reserve study is one of the most important guideposts you can follow to assure your association’s financial security and to protect home values.

Associations are responsible for dozens of components that have a limited useful life. Figuring out when each one is going to need repairs, and deciding how to strategically budget for such an eventuality, is best left to specialists who’ve garnered years of experience. This is where your reserve study experts and your management company can help. With a reserve study in place, you can work with your board and community manager to make sure your budget and savings align with the plan.

While it may seem daunting to provide for future costs without levying a special assessment, it is possible. Below are six tips designed to help boards get the most out of their reserve studies:

Tip One – Make sure your reserve study is done by an expert

Ideally this would be a professional who follows National Reserve Study Standards. This will ensure standards are being maintained and language remains consistent from reserve study to reserve study.

Tip Two – Reserve studies should be conducted regularly.

Regular reserve studies will ensure that the association is getting the most out of its money, as all information will remain current. For most single-family associations, reserve studies should be done every three to seven years. If you haven’t discussed it recently, talk to your managing company and board about when your next study should be scheduled, and add it to your association’s project plan.

Tip Three – Understand the different types of reserve studies and know which one the association ordered.

There are three types of reserve studies:

  1. The Full Reserve Study is the most expensive reserve study, and every association needs to conduct at least one of these after all their amenities and roads are built. This comprehensive review of the association’s resources categorizes all the association’s items that will incur wear and tear.
  2. The next type of reserve study is the Update with Site Visit, which boards should order every three to five years. A reserve study specialist will come to the association and do a basic review of the association’s components list to make sure the association’s reserve fund is keeping up with the HOA’s demands.Conducting semi-regular site visits may seem like an unnecessary extravagance to many board members. However, these site visits help reserve study analysts ensure they didn’t miss anything during the Full Reserve Study. Visiting the association will also help them analyze any additions made since the last study. Another important reason to have these types of studies conducted regularly is to ensure that the estimated wear and tear of the association’s amenities is accurate when compared to the real-life depreciation. A natural disaster can have a major impact on your association’s physical assets. Like oil changes for your car, these visits are worth the investment.
  3. The final type of reserve study is an Update with No Site Visit. This type of reserve study should be conducted every two years or so because it takes into account reserve balance changes, interest, inflation, and legislative changes that might affect the reserve fund.

Tip Four – Familiarize yourself with the key words involved in reserve studies.

  • Reserve Component List: an itemized list of about 25 to 35 items that the association is responsible for maintaining and that will need future repairs.
  • Useful Life (or UL): explains how long a reserve component should last.
  • Remaining Useful Life (RUL): the estimated amount of time that a reserve component is expected to last before it needs to be replaced.
  • Reserve Fund Strength: the amount of money the association has set aside in its bank account for upcoming repairs.
  • Reserve Funding Plan: a calculated report that shows the board what the association needs to do to either stay on track or get back on track financially.

 

Tip Five – Once results are in, immediately create a plan to add to the association’s reserve fund.

Most reserve studies will suggest setting aside 5% to 20% of the total budget, depending on the association’s assets, for the reserve fund. If you are behind on your funding and want to catch up, most reserve study analysts will encourage associations to increase assessments over the course of a few years instead of levying a special assessment.

Tip Six – Adding to the reserve fund is essential.

Planning and prevention is the goal. If your association falls into disrepair, property values can be adversely affected, and it can be even more painful to catch up. Think of it like paying cash or using personal credit cards.

As living in HOAs becomes more common, homeowners are becoming increasingly educated consumers. Many ask to see an association’s financials before making an offer on a house. If it’s clear there isn’t very much in the reserve fund, a potential homebuyer may rethink their decision. In essence, a flush reserve fund can make the homes in your community more marketable, which is good for everyone!

Seeking a reserve study and setting up a plan is worth it! Just like with your personal finances, when reserve funds are in order, you sleep well at night. A reserve fund creates financial stability within the association while protecting property values, and the reserve study is one tool board members have that enables them to easily understand the state of their reserve fund.