Refined Over Time – HOA Reserve Study

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Refined Over Time – HOA Reserve Study

A Reserve Plan (also called Reserve Study) is an essential part of running a homeowner association. It provides the Board with a systematic way to track the repair and replacement schedules of HOA assets over a thirty year period and a fair way to distribute the costs of those events to all the members who benefit from them over the timeline. A properly funded Reserve Plan eliminates the need of special assessments which are unfair to those that have to pay them. And with adequate funding, maintenance gets done when it needs to be done instead of piecemeal or deferred.

There are just too many advantages to reserve planning to ignore. The Board that follows a reserve plan is succeeding in a fundamental charge: to protect and maintain the HOA’s assets which have a direct correlation to the members’ home/unit values. Conversely, the Board that does not have or follow such a plan is guilty of negligence and failing in its fiduciary duty. The implications are clear and significant and the wise Board chooses the high road.

While thirty year plans are dandy, thirty years is a long time and things can happen that are impossible to predict. Inflation moves up and down as does return on invested reserves. Construction costs can be higher or lower based on competition, the state of the real estate market and the price of oil in Iraq.

One of the biggest wild cards in this thirty year projection is how well preventive maintenance is done. Preventive maintenance includes those little things that, if left undone, have a huge impact on a component’s useful life. For example, if a roof is not kept clean of moss, or small seam separations repaired, the normal useful life could easily be cut in half. Siding that is not inspected, repaired and caulked on a regular basis can fail years sooner than it should. Failure to perform regular and adequate preventive maintenance can undermine the financial prognostications.

How well the Board invests reserve funds can also impact the funding model. Improving the rate of return an average of only 1 to 2 % over the thirty year period can reduce owner contributions by thousands of dollars (in HOAs with extensive assets, hundreds of thousands of dollars).

The message is clear: A Reserve Plan is an essential planning tool for all HOAs but to be truly useful, must be tweaked and refined over time. It’s like tending a vineyard. Left untended, the fruit (value) will gradually disappear.

The annual budget review is the logical time to assess the condition of the Reserve Plan. A judgment should be made on the life and cost assumptions of each component included in the Plan. Do they still hold true or is there need for some revision? These judgments should be made by an objective and knowledgeable source like a Professional Reserve Analyst™ (see www.apra-usa.com) or a Reserve Specialist™ (see www.caionline.org). If the reserve fund Percent Funded is below 100% of what it should be, implement a funding strategy to increase that level to the 100% goal. Are there new components that need to be added, like a major landscape or sprinkler system renovation?

As the saying goes, “Change is inevitable (except from vending machines)” and this is particularly true about Reserve Plans. If your HOA has no Reserve Plan, arrange to have one performed as soon as possible. If you have one, hurray! Now, get out your clippers and start pruning. An annual update will produce great fruit.

Used with permission from Regenesis.net