What is a reserve study?
By Richard L. Thompson – Regenesis Reserves
A reserve study analyzes major repair and replacement needs like roofing and painting and provides a funding plan for accumulating money to perform this work when it’s needed. It is a fundamental planning tool that all homeowner’s associations (HOA) need.
There are several parts to the reserve study: First, all major HOA maintained components are identified. Next, the cost to renovate each item is then determined by contractor bid or construction cost estimate. Then, the remaining useful life in years of each item is established. These items are plugged into a mathematical formula:
Cost ÷ Remaining Useful Life = Money Needed Yearly for Reserve Fund
For example, if roof replacement costs $100,000 and the remaining useful life is 25 years, then $4,000 should be reserved yearly to pay for the work when it’s needed. Doing this procedure for each component will show the total money needed yearly to fund reserves. Each year, the reserve fund needs to be adjusted by area inflation and the interest earned on the invested reserve funds.
How should these reserve funds be accounted for? Reserve funds should be kept in a separate account from the normal operating funds. It’s conceivable that reserves will grow to thousands or millions of dollars. Prudent investing of these funds will reduce the amount of money contributed from owners.
Since the reserve study shows when money will be needed, long-term investments can be purchased that will return more than savings or money market accounts. Insured investments like government securities or Certificates of Deposit are recommended; however, there are other options so consult with a knowledgeable financial advisor.
When should a reserve study be performed? All homeowner’s associations, regardless of size, should have a reserve study done. Once done, yearly updates are needed to keep it accurate. If the HOA has inadequate reserve funds to begin with, the reserve study will provide a funding plan for “catch up.” To replenish the fund, several options are available:
- Special Assessment (lump sum contribution from each owner)
- A phase-in period of several years where HOA fees increase each year
- Combination of #1 and #2
Whatever course of action taken, the goal should be to reach “100% Funding,” which means the HOA will have the funds it needs to meet future repair and replacement events.
What sorts of financial problems can homeowner’s associations encounter with inadequate reserve funds set aside? Without adequate reserves, HOAs must rely on high-interest rate loans or special assessments.
Special assessments are unfair because owners that have bought and sold in the past fail to pay their fair share and current owners end up “holding the bag.” Special assessments are always a hardship on some owners and may be uncollectible if an owner’s equity and assets are small.
Also, since special assessments are unpopular, the tendency is for the board to postpone doing renovations. This deferral accelerates the deterioration process, detracts from curb appeal, and erodes resale values.
A reserve funding plan with regular and adequate contributions from all owners is fair and insures that renovation is done when it’s needed. Rarely, if ever, will special assessments be necessary.
Can poorly managed reserve funds affect the sale of units? Absolutely. Buyers and lenders look closely at how reserve funds are handled by the HOA. Lack of reserves is a red flag for an inevitable special assessment and a sign of poor board planning. If given the choice between buying into an HOA with healthy reserves or one with little or none, which would be the wiser investment?
Which types of repairs must be paid for by HOA funds vs. individual property owners? In common wall HOAs like condominiums, the owners are usually responsible for windows, entry doors, and unit interior repairs while the HOA is usually responsible for items like roofing, landscaping, siding, painting, paving, sidewalks, pools, clubhouses, signage, and fencing. But the governing documents are the authority on who does what.
What kind of qualifications should a reserve study provider have? The reserve study provider should have good budgeting skills, general construction knowledge, construction cost estimating experience, and a clear understanding of HOA operations.
How much does a professional reserve study cost? Reserve study professionals typically base their charges on the number of components included in the study, the number of units/homes, the age of the HOA, and availability of historical information. Travel expenses are a cost factor for distant properties. The charge is usually several thousand dollars and up depending on the complexity and location.
Are their professional qualifications for reserve study providers? Yes! Using an objective, knowledgeable, and experienced professionals who carry the Professional Reserve Analyst (PRA)™ credential is highly recommended.
Fall Fix Up
Every fall, homeowner associations should exercise a series of preventive common area maintenance functions. For small HOAs or those with few common elements, the list will be short and easy to complete. For larger, more complex complexes, the list can be daunting. But, overlooking these things can have disastrous and expensive consequences. Here’s a helpful checklist to kick start the process.
Brick & Stone. Check joints between wood and masonry. Waterproof, repair or repoint if necessary.
Close or plug foundation vent openings.
Check and correct grade for proper drainage away from foundation.
Check Smoke Detectors. Check for proper operation.
Clean Carpets. At least once a year and more often if traffic demands it.
Clean Upholstery & Draperies. Inspect and clean if necessary or at least every two years.
Clean Air Ducts. Clean at least every three years to abate mold spores and dust that trigger respiratory problems or allergies.
Decks. Remove potted plants and removable carpet. Both promote dryrot under wet conditions.
Door & Window Weather-stripping. Check around doors and windows and replace it if necessary.
Replace burned out bulbs for better security and night visibility.
Reset exterior lighting clock to adjust for seasonal change or replace with photocell system.
Fireplace Chimneys & Caps.
Arrange a professional chimney inspection. Have those that need cleaning done at the owners’ expense.
Install chimney caps where missing and replace those that have rusted out to protect your chimney from water, debris and critters.
Heating System Maintenance
A. Forced Air Systems. Remove flammables stored in the furnace room since the fumes could be ignited by the furnace when it’s fired up. Change the filters. Set the thermostat to heating mode and test the furnace to burn off the dust that collects over the summer and to ensure it is in working order.
Hire a heating professional to perform a maintenance check-up, including these steps:
1. Inspect thermostat for proper operation.
2. Inspect filter and change or clean as needed.
3. Check all electrical components and controls.
4. Oil motors as needed.
6. Inspect heat exchanger for possible cracks, which would introduce carbon monoxide into the living space.
7. Check air flow. If diminished, it may be necessary to clean the evaporator coil and duct work.
8. Check air fuel mixture, where appropriate.
B. Gas Burner System. Clean burners and ports, or have them professionally cleaned.
C. Oil Burner System, Have a professionally serviced; lubricate fan and motor bearings.
D. Heat Pump. Have a professional inspect wiring, belts and oil the moving parts.
E. Hot Water System. Have a professional check shut-off valve for leaks and drain lower water cut-off per manufacturer’s instructions. Lubricate pump and motor; bleed air from radiators or convectors.
F. Oil Fired Boiler. Have professional perform annual maintenance including flue cleaning, a fuel-filter change, cleaning and adjustment of the jets.
Prune back trees or shrubs at least three feet from the siding and roof.
Fertilize, thatch, aerate and reseed turf areas.
Arrange for sweeping.
Have drains cleaned out.
Repair deteriorated areas.
Check for rust or white lime deposits that indicate leaking.
Install covers on outside hose bibs if danger of freeze is possible.
If drain line blockage is common due to buildup or tree roots, perform a preventive flush or rooting to prevent back ups and flooding.
Check for warping, aging, moss and cracking; Repair or replace as needed.
Inspect and repair flashing around chimneys, skylights and vents.
Sweep to remove debris; clear all drains and scuppers.
Inspect and repair separated roofing seams, parapet wall caps, vent and pipe flashing .
Roof-Gutters & Downspouts. Clean gutters and downspouts and make sure they are running clear.
Siding. Inspect all, especially sun and weather sides, for deterioration, cracks, splintering, decay, and insect damage; clean, treat, recaulk and repair as needed.
Snow & Ice Preparations. Make sure your ice and snow removal equipment is in good repair. Buy snow melt product and place in accessible locations near steps and walkways for residents’ use. Contract for future snow removal if appropriate.
Stucco. A chalky residue is evidence of oxidation and deterioration of paint or color coat that reduces stucco’s effectiveness. Check for cracks which allow water to get in around windows and doors. Hire a professional to correct the problem.
Trim. Remove peeling paint on the trim and fascia boards, window sills and sashes; Prime and repaint as needed.
Every six months turn off the energy source and flush until clear of sediment.
Inspect flue assembly (gas or oil heater); check for leaks and corrosion.
A timely and well executed Fall Fix Up can go a long way to preventing unexpected failures of your building and grounds components. It will also ensure that your components get the longest life and reduce unnecessary expenses. Guess what? Fall is here and it’s time to get busy!