Every few years, most homeowners’ associations (HOAs) engage in what’s known as a “reserve study.” A reserve study comprehensively analyzes a community’s property, finances, and future expenditures. The study identifies and estimates future repair costs and capital improvements by evaluating the condition of the HOA’s shared assets such as roofs, pavements, playgrounds, community buildings, and common areas. Once this information is identified, the study determines how much money the HOA needs to set aside in a reserve fund to cover these anticipated expenses over the next few years.
Reserve studies, which generally fall under the fiduciary duties of the HOA board, need to be updated every few years to ensure that an HOA’s reserve funding is adequate and sustainable.
Reserve studies are relevant to HOA residents for several reasons.
- They lower the need for special assessments. If the HOA can ensure that it has enough funds to carry out critical maintenance and updates of the property, there is less chance that it will need to levy a surprise “special assessment,” or a sudden surge in HOA dues to cover problems.
- They allow for better planning. Reserve studies can identify the repairs and maintenance tasks that are most urgent in a community, allowing stakeholders to plan more effectively and ensure that no assets are reaching the stage of expensive or dangerous deterioration. When HOAs have a detailed priority list for repairs and maintenance, they are better able to shop around to find service providers who offer the best rates.
- They lead to more stable property values. A poorly maintained community that must delay or skip maintenance and replacement tasks altogether is financially unstable, which will negatively affect property values for community owners. While no one likes it when HOA dues are raised, owners like it even less when property and resale values fall or fluctuate unpredictably.
- They maintain fairness. When reserve studies are done too seldom, they can lead to some property owners paying for a larger share of improvements than is fair. (For example, a homeowner who buys shortly before an extensive roof replacement for which there are insufficient funds, leaving the previous unit owner having enjoyed the benefits of not paying for a new roof for many years.)
How Are Reserve Studies Calculated?
To begin, the HOA will hire individuals to assess the condition of shared features such as exterior walls roofs, and common areas. Once these conditions are fully evaluated, the HOA can then estimate the asset’s remaining useful life. The individuals preparing the study will then research replacement costs under current economic conditions – taking into consideration inflation and other factors – and determine the future replacement and maintenance costs. Finally, the study will aggregate future costs against an anticipated timeline, allowing for a financial plan to be created.
How Often Should Reserve Studies Be Conducted?
In general, experts recommend that HOAs engage in updated comprehensive reserve studies every one to five years, depending on the particular circumstances of the HOA. Reserve studies that are too old may make erroneous conclusions about needs and costs, so the longer an HOA goes without an updated study, the more its financial health could be at risk.
Paladin Property Management offers management of day-to-day operations for HOA client associations, including reserve studies, maintenance requests, communication, collection of common charges, payment of vendors, bookkeeping, rule enforcement, resale packages, and construction projects, as well as any other routine administrative responsibilities. We offer consulting services to HOAs that are largely self-managed. For more information or to contact us, call 860-395-8863 or visit our website.