Reserve studies are in-depth analyses and on-site inspections of an association’s assets and serve to project a financial road map for the association going into the future. They play a pivotal role in assisting the board in making the best financial decisions regarding the organization’s future. They are especially important for homeowners associations because many projects that impact the common ground, whether it’s new roofs or a new swimming pool, are very large and costly and require years of planning in order to pay for. Reserve studies help boards get a more accurate picture of the finances available to them now and in the future so they can plan for big expenditures.
Reserve studies have multiple parts. After performing an on-site inspection and evaluation of an association’s finances, a report will be drawn up with a list of all major areas of the association that are funded through reserves, an evaluation of the health of the current reserve fund and recommendations for a multi-year reserve funding plan. It will also go into detail about the expected lifespan, the remaining lifespan and the current replacement cost of all the major areas of the association funded through reserves.
Many states do require reserve studies to be done at certain intervals. Although state laws vary wildly when it comes to association law, the most common requirements are updates every third or fifth year. However, this is often not good enough. It is also required by the Federal Housing Administration that, at minimum, ten percent of a condo association’s operating budget must go into reserve accounts. However, depending on the association, that may not be enough to meet its needs either.
The primary reason why associations need to have a new reserve study each year is simply because they eventually, and sometimes quickly, become out of date. Expenditures, available funds, assessment income and the physical condition of the buildings and grounds in the association change and therefore reserve studies become out of date as deterioration gradually happens. When reserve studies aren’t updated for years, boards work with outdated information and sooner or later are more likely to run into financial problems. Reserve studies are also required for prospective new owners to be approved for FHA insured loans, which helps sell properties and keep their values up.
Reserve studies also lessen the need for special assessments, which are disruptive to communities, can embitter home or condo owners and also are usually difficult to get passed. The numbers are pretty clear: when changing to performing a reserve study annually, associations that updated their reserve studies every five years experience a 35.1% decrease in special assessments and associations that updated their reserve studies every three years saw a 28.5% decrease in special assessments.
So 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.