If you are a part of the homeowner association HOA and you don’t know what a reserve study is, then it is time that you should know about it. This guide is going to step by step take you through every detail you need to know.
What is a Reserve Study?
Repair, maintenance, and fixtures are a regular part of every association. Basic amenities can wear out, roofs need repair, or sometimes, a new addition to the structure is required. All this can happen only if you have enough funds to carry out all these tasks. That’s where a reserve study can help you.
A reserve study is a tool that helps to determine how much money should be kept aside as a reserve fund for future repair and maintenance tasks. According to a study, almost 60-70% of HOAs are underfunded. Result? They run out of the funds during maintenance because of the poor estimation of the improvements required.
So, a reserve study looks at the property, amenities, and other components of the association to see if and when certain property needs to be repaired and how much funds will be required for this purpose. For example, if your association has a playground with swings and benches, they will definitely require repair or replacement after some time. That’s where a reserve study will help to estimate how much funds should be saved to carry out this task when the right time comes.
Types of Reserve Studies
There are basically two types of HOA reserve study, the physical study and the financial study.
● Physical Study
The physical analysis analyzes the current condition of the assets of the association. It includes the repair, maintenance, and replacement of any component of the property to maintain the outlook and health of the property.
● Financial Study
Whereas, the financial study is predominantly targeted to evaluate the current reserve status, how much reserve funds should be collected to meet the maintenance and repair estimated in the physical analysis part.
Both these types of reserve studies are equally important and it is difficult to carry out repair and maintenance properly if any of this study is missing the details.
Benefits of a Reserve Study
A reserve study is not limited to just giving out an estimation of the future maintenance funds. It has many more benefits, like:
- Decreasing the possibility of over the budget expenditures and loans.
- Keeping legal issues in check.
- Giving an idea of the health of the property.
- Telling the bidding budget for repair and maintenance.
- Helping in community’s well being and betterment planning.
There are many more benefits associated with a reserve study that make it an essential part of every HOA plan.
Frequency of a Reserve Study
Some states have made the reserve study part of their law. It means that it is mandatory for an association to conduct a reserve study by law. You can come under fire if you don’t conduct any study to analyze the condition of your property and money required to maintain it.
Different states and local governing bodies have assigned different time frames to conduct a reserve study. For example, some states ask HOAs to conduct a study after every five years, while others have given an estimated time of two years.
However, it is important to note that not all states have laws regarding HOA reserve study. But it doesn’t mean that reserve funding study is not important for you if you live in a state that doesn’t contain any law regarding that. In this case, you have to take care of this matter within the association board. Here are a few things that might help you estimate how frequent you should conduct a reserve study:
- How frequently the property is being used?
- When was the property or asset built?
- What is the contractor’s guaranteed time?
These are just a few factors that help to determine the frequency of conducting a reserve study.
Living in a community is a great idea, but maintaining it is equally important. So, now you know what you should do to keep a balance between funds and property repair requirements. It might cost a bit to conduct a HOA reserve study when you hire a professional. The charges can go up to $2,000 and more. But this cost can save you from taking hefty loans if you run out of funds in the middle of a repair and maintenance project. So, keep your reserve study updated and live a better life!