Reserve Study for HOAs - Everything You Need to Know
Condominium and homeowner associations have very strict budgets and spending plans in place for their communities. Reserve studies allow them to easily keep track of finances and allocate appropriate amounts of money for association-wide expenses like repairs and maintenance.
In order for such associations to not run out of money while continuing to upkeep their amenities and living quarters, they need to go through a triennial process that judges the performance, as well as recommended future use, of their reserve fund.
What is a Reserve Fund?
In order to understand the meaning and purpose of a reserve study, you first need to know the significance of a reserve fund as these two components work hand in hand.
A reserve fund is essentially a financial account with a singular purpose; to set aside finances that plan for future expenditures. The obligations in question are any non-negotiable repairs, maintenance or replacements that are necessary for the smooth and safe operation of a housing association.
Over time, roads and sidewalks, pools, or other communal areas may need repairs or replacements. The reserve fund can be utilized to fund these projects that don’t need to be done on a regular basis.
The point of the reserve fund is to have money saved up for projects that you can’t strategically plan for because they’re not regular maintenance. The fund serves as a readily available balance that has accounted for all those projects and helps ensure long-term financial stability for the association.
What is a Reserve Study?
Now that you understand the basis of a reserve fund, a reserve study serves as a check-in on that fund.
For HOAs, a reserve study is a comprehensive evaluation of the association’s common areas and shared amenities. The study assesses the condition, estimated lifespan, and determines the anticipated costs for maintenance, repairs, and replacements over time for those amenities.
This kind of assessment helps the HOA plan and manage its reserve fund appropriately to ensure sufficient funds are available to cover future expenses. A qualified professional will provide insights on necessary reserve fund amounts and goals, as well as recommend how to maintain the community's property values before those repairs need to be completed.
Types of Reserve Studies
Reserve studies conducted for HOAs typically consist of two components; a physical and financial analysis. The physical analysis is the assessment of the physical condition of any common or shared areas of the housing community. The quality and cost of potential repairs are analyzed.
The financial analysis looks at the HOA’s current reserve fund and its overall financial standing as well as the history of its use and growth or depletion overtime. During this analysis, there is an additional assessment of projected or known expenses, revenue, and the current balance of the fund.
There are four different types of reserve studies offered depending on your HOA’s needs and budget that conduct either a physical or financial assessment, or both.
Preliminary Study
The first is the preliminary study. This usually happens before a community is actually built and this study estimates a budget based on engineering and architectural plans. Because there are usually no amenities to examine, the preliminary study only reports a financial analysis.
No Site Visit
The next type of study is one with no on-site visit. This means that all assessments are conducted over the phone between the HOA board, staff, and other crucial parties. Again, because of the fact that there is no onsite visit and no physical evaluation of the HOA’s amenities, only a financial analysis is conducted.
Site Visit
A reserve study with a site visit includes both a financial and physical assessment. This kind of study is recommended to be repeated every three years as well as before and after every major project.
Full Reserve Study
A full reserve study is the extreme version of a site visit reserve study. These kinds of reports are usually conducted if an HOA hasn’t had a study done in 10+ years and requires major updates to their association data.