A well-defined reserve study can be a Homeowners’ Association (HOA) board’s “best friend.” It isn’t just a static report – it’s a real world, actionable guide for mitigating potential liabilities and property devaluation. When your community’s reserves appropriately funded, it can make the otherwise cumbersome tasks of repairs and replacements run smoothly and effectively.
The foundation of your reserve study is an intelligible analysis of your property’s assets or components; it will define your funding requirements, as well as the courses of action for the repair expenses you should incur in any given year.
Comprehensive Inventory of Assets
Roofing, elevators, and heating systems – these building components are obvious even to the untrained eye, and are never going to be missed on your component list. However, the average board member or management company isn’t going to catch all of the elements that require tracking and proper funding without the help of a reputable outside study.
Understanding the myriad of systems to be catalogued, as well as identifying “grey components” – components that are not easily definable – and the wisdom of budgeting for them within your budget, is vital to determining the proper allocation of reserve funds. The professionals you hire for the study should ideally have not only an accounting mindset, but also a full understanding of building construction and the role property management plays in its proper maintenance.
Elements of a Component’s Condition
Knowing which element(s) should come into play, as well as understanding their order of important at any given time, is part of the role of a reserve study specialist. Relying on a specialist will ensure that the appropriate factors have been taken into consideration in compiling your reserve funding plan.
- Physical Assessment – Evaluation is made of observed or reported malfunctions and less than standard conditions are duly noted.
- UL – Useful Life – Also known as Depreciable Life, the UL is the estimated number of years a component can be expected to continue to serve its intended function if properly constructed in its present application or installation.
- RUL – Remaining Useful Life – Also referred to as ‘Remaining Life,’ the RUL is an estimate of years that a component can reasonably be expected to continue to serve the function for which it was intended.
- Current Replacement Cost – The price to replace, repair or restore a component to its original functional condition.
Annual Reviews and Updates
Though States like California may require a reserve study to be completed every three years and annual reviews every year – see https://www.davis-stirling.com/ReserveStudyFrequency/tabid/1612/Default.aspx#axzz1pbATB6rb, other factors can certainly dictate the wisdom of contracting an annual update. A yearly review ensures you will catch adjustments needed in component UL or RUL figures, due to condition or changes in use.
Yearly updates are also an important consideration in winning FHA Approval – a determining factor in whether your community will bring more first time buyers or real estate investors into your HOA. Without access to these types of loans in the current economic climate, many buyers cannot qualify. Without demand or opportunity for a great quantity of buyers to qualify, your property values will inherently decrease. It’s simply a supply demand issue.
The proper funding of your reserves will decrease your community’s exposure to liability, both today and over the long haul. As your management team and board members work toward protecting, maintaining, and the upkeep of your HOA, they will not only gain the confidence of your HOA members but also help drive up the value of homes in your community.