Aspen Reserve Specialties is pleased to provide useful information regarding Reserve Studies to better inform the public about their use.
Your Reserve Study should be reviewed at least once a year for obtaining proposals in advance of pending projects, and to make sure the Reserve funds are in line with projections. The outcome of this report should be conveyed with the property owners as to the status of the Reserve fund. The property owners should also know what the Board of Directors plans are to improve or maintain the Reserve fund.
The question, “What is a Reserve Study?” is commonly asked to us. A Reserve Study is a tool used by Community Association Managers and Board of Directors to assist in the Budget preparation process. A Reserve Study identifies those common area assets that require reserve funding and then projects their associated costs into the future. The Reserve Study will evaluate the current status of the Reserve Fund, provide a recommended contribution rate and (the funding plan) that should be going into the Reserve Fund on a regular basis.
Reserve Study Companies develop a long-term budget report that assists an association in preparing for future major expenditures. These expenditures typically occur on a periodic basis (every 2+ years), as opposed to annually. As a result, the Reserve allocation makes up a significant portion of the total monthly dues. A Reserve Study provides the essential information that is needed to guide the Board of Directors in establishing the budget in order to run the daily operations of your association. It is suggested that a third party professionally prepare a Reserve Study since there is no vested interest in the property. Also, professional Reserve Study Companies know what to look for and how to properly develop an accurate and reliable component list.
Now, why do we need it done? There are many misconceptions as to why a Reserve Study needs to be prepared. We will outline a few of these misconceptions and provide an answer as to why you need a Reserve Study for your association.
Our association is 20+ years old, and we have run our property well over this time period.
Congratulations! It is great that you have been so successful the past twenty years. Now, you may need to consider some major expenses in the coming years and how are you going to plan for those expenses. Most likely roofs will need to be replaced, the asphalt will need to be overlaid, and the siding is starting to deteriorate and will need to be replaced soon. In most associations, these combined projects will cost well over a million dollars to replace. This doesn’t count mechanical equipment, pools, concrete work, etc. If the proper amount of money has not been set-aside in the past, it is likely the association will need to Special Assess, defer the project, or obtain a loan from a bank. More on the Special Assessment issue later. If the association goes to a bank for a loan, the bank is going to want a Reserve Study in place to make sure the association has a plan in place to avoid this problem in the future. If the project is deferred, the appearance of the property may be affected and the property values will decrease. Over the first twenty years of an association, there are a lot of major expenses to deal with. Some may be easy to handle as an operating issue, or from whatever money has been set-aside in the past. It is the major expenses that should concern the owners and how is the property going to pay for them.
We have in the past and will continue to Special Assess for the project.
While this may be an option for many associations, it is not fair and equitable to recent new owners. If an owner has bought into the association within the past couple years, it is not right for that owner to pay for siding that previous owners has enjoyed the previous 20 years. Ideally, the proper amount of money has been set aside (1/20th per year) so everyone is paying equal amounts to the Reserve fund for the time period they lived in the community. Also, if an association has a history of Special Assessments, then lenders may shy away from lending money to potential buyers. Lenders do not want to take a risk of providing money to someone that may be hit with a large Assessment, resulting is a chance they may not be able to afford their mortgage payment. In addition, a history of Special Assessments may deter potential buyers from even considering purchasing a unit in the community.
We are a brand new community. We don’t need to worry about major expenses for 20+ years.
True. But painting will need to start within 5 years of construction. Asphalt will need to be seal coated within 2 – 3 years of construction. Concrete repairs will be needed soon. While roofs, siding, mechanical equipment may not be necessary for many years; there will be many expenses the association will incur in the meantime. Also, an analogy we like to use is “Are you going to wait until you are 55 years old to start preparing for retirement?” Or, “Are you going to wait until your child is 16 years old before setting money aside for college?” We know everyone hopes to win the lottery for retirement, or receiving a scholarship for college, but for most of us, this will not happen. Therefore, a plan needs to be set in place as soon as possible, and for associations, that usually begins when the construction has been completed. In fact, several builders are starting to have money set aside in a Reserve account before turnover to the association occurs.
The Reserve Study may cost a couple thousand dollars and we can apply that money to replacing something.
Again, true. However, the money spent on a Reserve Study will come back and pay for itself within in a very short amount of time. A well maintained property will increase in property value, where an association that has deferred maintenance, “because they don’t have the money”, will decrease in value. Also, if there are two similar properties with similar assets and amenities, association “A” has $100,000 in the bank, while association “B” only has $25,000 in the bank, association “A” will be more appealing to potential buyers due to the funding status. The Reserve Study will also assist the Board of Directors in preparing for future expenses. It will help determine what projects will be coming up soon. It will also act as a guide in comparing bids from contractors. Reserve Study Companies have no vested interest in the community. We will be providing the facts with accurate numbers and estimated replacement costs. If the bid to replace the roof is coming in at 2x the estimated cost in our report, you may want to ask the roofer why the cost is so high. Tell them an outside party estimated the cost to be only $XXX,XXX. Inquire with the contractor before contracting with them as to why the cost is so different.
We just had a study completed a couple years ago. Why do it again?
Reserve Studies typically cover a 30-year period, so the information should be accurate for 30 years. Wrong. While we like to know the exact cost, the exact replacement time of a component, and the exact inflation rate and interest earnings, we all know that things can change from year to year. Also, what if the association doesn’t follow the recommendation in the report? These are all factors that will affect the financial section of the report, and possibly the recommendation. In addition, elements have an effect on how components will age. Therefore, unless the current Reserve balance is very close to what was predicted in the previous report and every component has been addressed on schedule, then it is time to update the past report. We recommend updating Reserve Studies every 3 – 5 years.
We know there are several other scenarios as to why an association does not need a Reserve Study. The bottom line is that an association cannot run their “corporation” accurately without all the facts. A large part of your monthly dues should be going to a Reserve account. How do you know the funds being set-aside are accurate without having a report in place? Part of obtaining all the facts is to have a professionally prepared Reserve Study completed for your property.
We hope this letter has addressed questions and concerns a Board of Directors may have in “why it is important to have a Reserve Study for our association”. Good luck don’t be afraid to rely on Reserve Study Companies if you ever have any questions or concerns regarding Reserve Studies.
First, take the time to review the report carefully. Make sure the component information is complete and accurate. If there are any inaccuracies with your HOA Reserve Study, please inform us immediately so we may revise the report.
Once you feel the report is an accurate tool to work from, use it to help establish your budget for the upcoming fiscal year. The reserve allocation makes up a large portion of the total monthly dues. This report should help determine the correct amount of money to go into the reserve fund. Additionally, the Reserve Study should act as a guide to obtain proposals in advance of pending projects. This will give you an opportunity to shop around for the best price available.
The HOA Reserve Study should be readily available for real estate agents, brokerage firms, and lending institutions for potential future homeowners. As the importance of reserves becomes more of a household term, people are requesting homeowners associations to reveal the strength of the Reserve fund prior to purchasing a condominium, townhouse or single family home.
Contact us today to learn more about our Colorado reserve studies offered, as well as report studies for surrounding states: 303) 790 – 7572.
Reserve Study updates should not be considered a one-time deal. Unfortunately, there is a misconception that these reports are good for an extended period of time since the report has projections for the next 30 years. Just like any major line item in the budget, the Reserve Study should be reviewed each year before the budget is established. Invariably, some assumptions have to be made during the compilation of this analysis. Anticipated events may not materialize and unpredictable circumstances may occur. As a general rule, Reserve Study updatesshould be performed every 2 – 4 years.
Measurements of percent funded strength:
0% – 30% Funded – Is considered to be a “weak” financial position. Associations that fall into this category are subject to special assessments and deferred maintenance. This situation could lead to lower property values. If the association is in this position, actions should be taken to improve the financial strength of the reserve fund.
31% – 69% Funded – Majority of associations are considered to be in this “fair” financial position. While this doesn’t represent financial strength and stability, the likelihood of special assessments and deferred maintenance is diminished. Effort should be taken to continue strengthening the financial position of the reserve fund.
70% – 99% Funded – This indicates a financial strength of the reserve fund and every attempt to maintain this level should be a goal of the association.
100% Funded – This is the ideal amount of reserve funding. This means that the association has the exact amount of funds in the reserve account that should be at any given time.
For more information about Colorado reserve studies from Aspen Reserve
Contact us today to learn more about our Colorado reserve studies offered, as well as report studies for surrounding states: (303) 790 – 7572.
Legal Reserve Study requirements vary from state to state, however the government does require reserve studies in approximately 20 states. Even if it is not currently governed by your state, the chances are very good that the documents of the association require the association to have a reserve fund established. This does not mean a Reserve Study is required, however it is hard to know if there are enough funds in the reserve account if you don’t have the proper information.
Some associations look at the reserve fund and think $50,000 is a lot of money and they are in good shape. What they don’t know is that the roof is going to need to be replaced within 5 years, and the cost of the roof is going to exceed $75,000. So while $50,000 sounds like a lot of money, in reality it won’t even cover the cost of a roof, let alone all the other components the association is responsible to maintain.
Many states have passed legislation or have pending Legal Reserve Study requirements to protect homeowners’ interests. In addition, many lending institutions require an association to have a reserve study in place before they will approve funding. Lastly, homeowners are becoming increasingly educated regarding reserve funds and often request to see documentation before purchasing a home in a community.
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The cost to have a Reserve Study performed can vary widely depending on each Association’s amenities.
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Knowing when to perform a reserve study is very important. Most associations have a Reserve Study prepared a few months in advance of their Fiscal Year End, to provide information for the year-end budget preparation process.
Aspen Reserve Specialties recommends obtaining a Reserve Study bid approximately six to eight months in advance of the Fiscal Year End. This gives the Board a month or two to choose the appropriate Level of Service, select a Reserve Study Professional (or a volunteer board member) to perform the work, gives the Reserve Study provider a month or two to get the Reserve Study performed, allow the Board of Directors a month or so to review the completed report, and sufficient time to use the resulting information in the budget preparation process prior to Fiscal Year End.
HOA Reserve Studies are extremely important. How can a Board responsibly choose to not care for an association asset? All physical assets are gradually deteriorating every day. As the physical value of that asset moves from “new” to “old”, there needs to be an offsetting growth in the Reserve Fund in order for the Board to claim they are responsibly caring for the assets of the corporation. In addition, if the Board ignored a Reserve Study that indicated the funding needs of the association and the Board chose to not reserve for one or more components, there could be some real liability exposure.
In the coming years roofs will need to be replaced, the asphalt will need to be overlaid, and the siding will start to deteriorate and will need to be replaced. In most associations, these combined projects could cost well over a million dollars to replace. This doesn’t count mechanical equipment, pools, concrete work, etc. If the proper amount of money has not been set-aside in the past, it is likely the association will need to Special Assess, defer the project, or obtain a loan from a bank. If the association goes to a bank for a loan, the bank is going to want HOA Reserve Studies in place to make sure the association has a plan in place to avoid this problem in the future. If the project is deferred, the appearance of the property may be affected and the property values will decrease.
The Board’s primary responsibility is to protect, maintain, and enhance the assets of the corporation. That is done when the deterioration of physical assets are offset by the growth of financial assets. Physical deterioration cannot be ignored. Two wrongs don’t make a right.
Learn about HOA Reserve Studies, their significant importance, and the services offered by Aspen Reserve Specialties. Contact us today at (303) 790 – 7572.