Managing a homeowners association (HOA) requires careful financial planning to ensure there is sufficient savings to cover all expenses. In addition to budgeting for regular maintenance, HOAs must also plan for emergencies, future capital projects, and the routine repair or replacement of things that wear out over time.
Thankfully, HOA boards don’t have to use guesswork to know how much they need to save. Reserve studies can be used to ensure that sufficient funds are set aside to cover future known expenses.
What Are Reserve Studies?
A reserve study is a financial planning tool that HOAs can use to determine how much money they should keep in reserve to cover major repairs or replacements. It can be used for roofs, HVAC systems, parking lot repaving, and other things. An HOA’s reserve is typically separate from the money it uses for operating expenses.
When a reserve study is done, an HOA’s assets are evaluated to determine how much time is left before major repairs will be needed or things need to be replaced. The estimated replacement or repair cost is also determined.
Because reserve studies are often complex, they are usually done by Reserve Specialists, who are certified by the Community Associations Institute (CAI). These professionals have the knowledge and experience to evaluate an HOA’s assets and make appropriate reserve recommendations.
How Often Should Reserve Studies Be Done?
Reserve studies should be done often enough to keep up with the changing economy. During periods of high inflation, for example, the cost to replace or repair items may increase substantially in a short period and reserve studies may be needed more often. An HOA’s governing documents may also stipulate how often reserve studies must be done.
It’s also important to check your state’s requirements for reserve studies. California, for example, requires HOAs to have reserve studies done every three years with annual reviews.
How Much Do Reserve Studies Cost?
The cost of a reserve study is typically $500 to $10,000 and varies depending on the property size, number of units, location, and other factors. Whether your HOA will need a full reserve study or an update will also influence the cost. Reserve study updates can be done with or without a site visit.
Implementing Recommendations
After a reserve study is completed, the Reserve Specialist will submit a report to the HOA. It’s then up to the board to implement the recommendations.
Here are some things that HOAs can do to help them manage their reserves.
- Communicate with homeowners: Make sure all homeowners have copies of the reserve study report so they can review its findings. An HOA meeting can also be held to answer questions and address concerns.
- Allocate funding: If additional funds are needed to build an HOA’s reserve, the monthly dues may need to be increased. An assessment may also be required if a major expense is expected soon.
- Prioritize projects: The reserve study report may include recommendations to prioritize certain repair and replacement projects. Taking care of urgent projects first may give an HOA time to save money for projects that can be delayed.
- Ensure legal compliance: Check with your state to see if there are any specific requirements for reserve studies. A Reserve Specialist or attorney may help with this.
- Seek multiple bids: When it’s time to repair or replace something, obtain multiple bids to make sure you get the best price. Also, be sure to read online reviews for contractors and service providers to make sure you hire someone who will do the job correctly.
Preparing for Your HOA’s Financial Future
A reserve study is something that all HOAs should periodically do to prepare for future repairs and replacements. Not only is it a good idea, but it may also be required by your HOA’s governing documents or by the state. Reserve studies should be performed by certified Reserve Specialists, and either a full reserve study or update should be done annually to account for changing economic conditions.
Maintaining adequate financial reserves is something that HOAs should prioritize, and being caught off guard could result in an unpopular assessment. Using a reserve study to prepare for the future will not only help you stay on top of repairs and replacements, it will also help to build the trust and confidence of your HOA members.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, accounting or professional advice.
