Reserve studies are a vital aspect of HOA management. They are used to gauge the condition of the association’s reserve fund to better plan a long-term budget. The complexity of an HOA reserve study can often intimidate and scare off members of the board to the point where they refuse to go near it. With a little more understanding and a few helping hands, one will realize that it’s an indispensable part of running an HOA.
In this article:
- • The Significance of an HOA Reserve Study
- • What Is a Reserve Study?
- • How to Perform a Reserve Study for HOA
- • How Often to Do a Reserve Study
- • How Reserve Studies Affect Special Assessments
- • How Much Does an HOA Reserve Study Cost?
- • Stay on Top of HOA Reserve Funds
The Significance of an HOA Reserve Study
Reserve studies are especially important for homeowners associations. Many projects that impact common areas — whether new roofs or a new swimming pool — are very large and costly and require years of planning.
HOA reserve fund studies help the board get a more accurate picture of the finances. They cover the funds available now and in the future, so they can plan for big expenditures. Obviously, it’s a critical tool for HOA boards. The question is: how are they done and how often should they be done?
What Is a Reserve Study?
An HOA reserve study or condo reserve study is an in-depth analysis and on-site inspections of an association’s assets. Usually provided as a service of a management company, the study projects a financial road map for the association going into the future. These studies for homeowners associations play a pivotal role in assisting the board make the best financial decisions regarding the organization’s future.
Generally, an HOA reserve study consists of two parts:
- • Physical Analysis. This portion of the study assesses the physical condition of community areas that an HOA is responsible for maintaining and repairing. It also includes an analysis of the cost of repair or replacement.
- • Financial Analysis. This portion of the study assesses the association’s financial health, such as its revenues, expenses, and reserve fund balance.
How to Perform a Reserve Study for HOA
An HOA reserve study consists of multiple steps. First, the management company performs an on-site inspection and evaluation of an association’s finances. Then, a report will be drawn up listing all major areas of the association funded through reserves. The report includes an evaluation of the health of the current reserve fund and recommendations for a multi-year reserve funding plan.
Finally, the report lists the expected lifespan, the remaining lifespan, and the current replacement cost of all the major areas of the association funded through reserves. Because this report is so comprehensive, it is recommended to hire a management company or other financial professionals to prepare an HOA reserve study.
How Often to Do a Reserve Study
Many states require reserve studies to be done at certain intervals. California, for instance, has laws in place concerning reserve studies for homeowners associations. According to California Civil Code §5550, the board must perform a reserve study every three years and review the report annually. Other states may have a different mandate.
Although state laws vary wildly when it comes to association law, the most common HOA reserve requirements are updates every third or fifth year. However, this is often not good enough, but we recommended reserve studies to be done once a year to avoid an increase in special assessments, which we will discuss below.
How Reserve Studies Affect Special Assessments
Homeowner association reserve studies can quickly become out of date. Shifts in the economy can seriously affect expenditures, available funds, and assessment income. Periods of extreme weather and natural disasters can dramatically damage buildings and grounds in the association.
When reserve studies aren’t updated for years, the board works with outdated information. Sooner or later, an HOA will run into financial problems. That will mean either scrapping projects or calling for a special assessment. These unexpected fees can be disruptive to communities.
They embitter association members and also are difficult to get passed. The numbers are pretty clear: after switching to annual reserve studies, associations that updated their reserve studies every five years experience a 35.1% decrease in special assessments. Associations that update their reserve studies every three years saw a 28.5% decrease in special assessments.
How Much Does an HOA Reserve Study Cost?
Because of the complicated nature of reserve studies, HOAs are recommended to seek professional help from management companies. The cost of an HOA reserve study varies depending on the type.
The most comprehensive type of reserve study naturally comes with the biggest price tag. This type involves a full-scale evaluation of the association’s physical and financial condition. The second most expensive type is a reserve study that requires a site visit. These two types can cost anywhere between $600 and $1800, depending on the company an HOA hires.
Finally, the most affordable type is one that doesn’t require a site visit. Typically, this level of study can cost anywhere between $250 and $500. Again, the price depends on the company.
While it may be tempting to go for the cheapest option every time, it must be noted that this type of HOA reserve study is the least comprehensive. It will yield more unreliable results compared to the first two types and will only cost the association’s members more in the long run.
Stay on Top of HOA Reserve Funds
There are many benefits to community associations that update their reserve studies once a year rather than once every three or five years. It decreases the need for special assessments, gives boards and property managers an accurate picture of their association’s finances, and allows an association to accurately plan for major expenditures down the road.
Although it may be a daunting task, an HOA reserve study can save the association plenty of time and money down the road. Due to the intricacy of reserve studies, consulting with an HOA management company is the best course of action. These management companies come equipped with the level of skill and competence required for such an undertaking. Moreover, these experts have knowledge that goes beyond financial matters.
For an HOA management company fit for the job, look no further than Cedar Management Group. Feel free to give us a call should you need our help.