What is an HOA reserve study, and should you do it now? If you’re one of the board members and wondering what HOA reserve studies are for, this might just be the right time to learn more. A homeowner association reserve study is always a useful tool to have for budgeting. It’s true whether you work for a house and lot development or looking into a reserve study for condo associations. But first, let’s start with a reserve study definition you can work with.
In this article:
What Is an HOA Reserve Study?
It consists of physical and financial analysis of common area components to help with the association’s budget planning. An HOA reserve study analyzes the current reserve fund, it’s status and the rate it is being replenished.
It also studies the ongoing deterioration of the common capital items the HOA is responsible for. The HOA reserve study tries to answer questions like: “how much time does it have left?” or “when will we need to replace it?”.
The HOA reserve study also anticipates the expenses that a homeowner’s association may incur, so you and the HOA board have an idea of how much it would cost to have a capital item replaced. A comprehensive HOA reserve study would also create an equitable plan that will cover these costs.
In that way, the HOA board knows how much money they need to keep in their reserves to replace important capital items when they wear out.
The more detailed HOA reserve studies can also cover the recurring maintenance costs of community facilities. Some examples of these expenses are landscape replacement, road painting, and amenities maintenance. All long-term assets that need periodic maintenance are counted here. This way, the community managers have everything accounted for in case there is a shortfall in the regular association funds.
How Much Does An HOA Reserve Study Cost?
The price of the study will depend on when it was done. For the average associations with annual budgets of under a million, the cost can be between $400 and $600. The more detailed the HOA reserve study you ask for, the costlier it gets. Out of the three levels of reserve studies, “level III” studies are the most inexpensive. These are done to update prior studies, and usually do not involve site visits.
Reserve studies at “level II” or “Update With Site Visit” do involve visual on-site inspections, and are usually done every two to five years. These cost more than regular level III updates.
The most expensive of HOA reserve studies are referred “level I” or “Full”. These studies include site inspection done by facility professionals, and they can include a complete inventory of the items included in the reserve components. These can cost an association somewhere between $1200 to $1800. The community association must also take these fees into account.
How Long Is An HOA Reserve Study Good For?
For the most part, it depends on the state that the HOA is located in. The California Civil Code, for example, requires an annual reserve study update, with a “diligent visual site inspection” done every third year or more often.
Some states do not require reserve studies. Even so, a year to year study will help your HOA to manage your reserve funds.
Why Is It Important for Your Community Association?
Its main purpose is to give HOA board members a better idea of what the upcoming expenses are related to the maintenance of the common areas and when they’ll have to deal with these expenses. Upon knowing this information, the BOD can start planning a budget so that the community association can start allocating funds to the reserve.
Since the study oversees the maintenance of usable assets, the funds will offset the cost of deterioration as well as the repair, replacement, and maintenance of those assets. This lets the HOA avoid dipping into other sources of funds that are unaccounted for.
Furthermore, homeowners also benefit from the HOA reserve study. Homeowners can see the condition of the common area components, the strength of the reserve fund, and the preparation made by the HOA board members. The study can show where part of the homeowner’s association fees is going.
The replacement cost divided by the number of years that asset should last is the typical calculation for the reserve fund for an item. The answer is the amount to put in the reserve fund yearly.
Who Will Do It?
Not everyone has the background or let alone the certification to make a reserve study. Usually, the HOA board will outsource a professional reserve specialist to make the study for them. This takes the liability off the hands of the HOA board members, too.
You can get the reserve study done around 4-5 months before starting the new budget year. This gives the board time to approve it, especially if they don’t meet often. For BODs who only meet quarterly, it’s vital to get the reserve study done at least more than six months ahead of time to make sure the approval makes the new budget year and is implemented at the right time.
If you’re looking to save money, you may opt to hire a financial management company instead. This company can do your accounting books as well as your reserve study for a reasonable fee.
A Reserve Study Is a Must!
A reserve study helps the homeowner’s association to plan ahead and always keep tabs on the budget and funds they need. At the same time, it also contributes to the cleanliness and maintenance of community amenities and facilities. This study is part of the HOA board’s responsibility, and neglecting or ignoring it can lead to dire financial consequences later on.
Outsourcing Your HOA Reserve Study
If you’re unsure of how to go about a reserve study for your community, you can contact a good outsourcing company to see to your needs. It pays to have professionals with years of experience working with homeowners’ associations in the U.S. do the HOA reserve study for your association. They can help you with any financial management needs that you may have. We’re here to listen!
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