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The Importance of a Reserve Study

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Reserve StudiesA reserve study is a snapshot of the costs associated with replacing and/or repairing common area components over the long term.(think roof, pavement, pool, HVAC etc.)

A comprehensive study should cover all major repair and replacement costs and funds should be set aside (known as Reserve Funds) by the Home Owners Association.

To put it simply, Reserve Studies help you plan ahead and protect your property value.

In order to do this effectively a Reserve Study specialist will do the following:

  1. Examine the association’s repair and replacement obligations.
  2. Determine the costs and timing of replacement.
  3. Determine the availability of necessary cash resources.

Because the HOA board has a fiduciary responsibility to manage association funds, a replacement reserve budget is extremely important.

Not only does this information inform the annual operating budget by providing owners with necessary financial information; the study is also an important management tool as the association aims to balance and optimize long-term property values and membership dues.

An up-to-date Reserve Study and a healthy budget are important for prospective homeowners because it allows them to evaluate property values in a more effective manner.

They are equally as important for association members, because reserve planning helps protect against declining property values due to deferred maintenance and unforeseen special assessments.

A good reserve study shows owners and potential buyers an accurate and complete picture of the association’s financial strength and market value. It should also function as a maintenance planning tool for the association and property managers.

Interested in getting a Reserve Study for your community? Click here to get a proposal!

Reserve Studies and California Law

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In its simplest form you can think of a Reserve Study as two basic parts: Physical Analysis and Financial Analysis. An updated Reserve Study allows communities to anticipate and prepare for major repair and replacement costs.

Read more: What is a Reserve Study?

A properly funded Reserve according to an up-to-date study will allow your community to thrive both aesthetically and functionally. As a result, you can expect sustained and in some cases, increased property values. Due to the sub-par condition of the real estate market, we’re even seeing lenders review Reserve Disclosures, particularly Percent Funded (See Reserve Glossary),  when considering whether or not to fund new home buyers.

Read more: Reserve Studies: Like a FICO Score for HOAs

Get a Reserve Study Quote for your community

However, Reserve Studies are more than “good business”. In California, it’s the law.

There are 4 basic things to remember when it comes to Reserve Studies and California Law:

1. Every 3 years you must complete a Physical Inspection.

2. Every year you must complete an Assessment and Reserve Funding Disclosure (ARFD).

3. Every year, in order to complete the Reserve disclosure, you must you must do a Level 3 Update (Financial Update).

If you comply with these 3 basic requirements your community has fulfilled its fiduciary responsibility and is therefore protected under the Business Judgement Rule.

We get this question all the time from our clients: “does the law require us to fund our reserves?”

4. California State law does not require you to fund your reserves. It does however, require you to disclose that information either way (See number 2 above).

Communities who fail to prepare updated Reserve Studies and underfund Reserves are often forced to defer common area maintenance and repairs. This is a mistake that inevitably leads to falling property values, costly Special Assessments and financial implications for new home buyers considering your community.

Read More: The Reality of Underfunded Reserves

At Barrera and Company, we complete thousands of Reserve Studies each year which have helped our clients comply with the law and prepare for upcoming expenditures. 

Interested in getting a Reserve Study for your community? Click here to get a proposal!