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Reserve Studies | BarreraCo

Should HOAs Invest Reserve Funds?

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Investing Reserve FundsCommunity Associations, at various times, collect money to fund reserves and/or for working capital. Is it wise for Associations to invest these dollars while they are accumulating for future repairs and replacement of the Communities’ assets?

The answer is yes – but through well-informed decision making.

The first important thing to remember is that Reserve Studies assume some level of interest is being earned on reserve account balances.

However, these assumptions are relatively conservative with respect to the interest earned. Typically it will range from one to three percent.

But it’s important to note – the interest-earned component is an integral part of the funding plans for reserves. Therefore the Association should always have in place a policy or strategy for keeping the reserve balance in some low-risk, interest bearing account.

Put simply – Your HOA should seriously consider developing and approving an investment policy to help maximize the interest income while minimizing risk. For example, your policy should list types of acceptable investments as approved by the HOA Board of Directors. They might include Certificates of Deposit (CDs), Money Market Accounts, FDIC insured banks or other investment companies that are pre-approved by the Board.

The idea here is to make sure your money is always working for you but don’t lose sight of the inherent risk involved with investments. Always consult the appropriate professionals when setting up your policy.

Read More:  The role of an HOA board


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

Reserve Studies and Funding : Survey of 400 community managers

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A couple of months ago, the Foundation for Community Association Research conducted a survey of almost 400 community managers.

When asked whether or not the associations had a formal reserve fund, 93% of respondents stated that their association did, but the most interesting find of the survey has to do with the level of funding within these funds.

When asked the question “How does the association determine how much to keep in the reserve fund?” almost 20% responded with “What the association can afford to set aside,” but that they “do NOT believe is adequate”.

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While almost 75% of survey respondents indicated basing their reserve fund levels on the recommendations of professional Reserve Specialists, over 25% indicated that the amount in the Reserve Fund is dictated by whatever the association can afford to set aside.

For Homeowners Associations and Community Managers, this scenario can quickly become dangerous if a costly or emergency repair arises. More importantly, is that ultimately the reality and cost of underfunded reserves is passed on to the homeowners themselves. If an HOA can not properly maintain roads, pools, or roofs the value of residents’ properties may be harmed. When HOA’s resort to special assessments, the cost to owners can run in the tens of thousands of dollars – no small expense for the average homeowner.

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For owners and buyers, here are some quick tips to help you evaluate the financial health of an HOA:

  • If you are a buyer, demand that the seller provide you with copies of the most current financials for your review.
  • If you are an owner, make sure that you are given annual financial reports, especially the delinquency report and those pertaining to the adequacy of the reserve account.
  • If you are a buyer, do a physical review of the property and observe how the common areas are maintained. For example, assess the condition of exterior paint, amenities, roads, roofs, drives, fencing, etc.
  • If you are an owner, be involved with the board and its decisions, especially when you see deferred maintenance of common areas or are subject to special assessments.(Joseph Aiu, California Department of Real Estate, 2012)

For more information on the effects of Underfunded HOA’s,  read this Consumer Warning from the CA D.R.E.

All images taken from CIARF.org’s Snap Survey : Reserve Studies and Funding.

Click here to download the report.

To find out more about our procedures for conducting reserve studies, or to be in touch with a reserve study specialist click here or give us a call at (800) 543-8670.

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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!

Homeowner bankruptcy and your HOA

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News no one wants to hear: A delinquent owner’s property is being foreclosed and has filed for bankruptcy.

Here’s what you need to know about protecting your HOA:

The first thing you need to do is find out more about the filing. Your association’s response to the situation depends on the chapter the owner files under. Typically, you’ll see chapter 7 or 13.

Chapter 7 Bankruptcy:

Bankruptcies usually resolve in three or four months and there’s not a whole lot your association can do about it once the process has started. The owner’s assets will be liquidated and they’ll get relief from their personal liability for their debts.

If a delinquent owner files for Chapter 7 protection and your HOA hasn’t previously filed a lien, it will be classified as and unsecured creditor. Unfortunately this means that the owner will be discharged of that obligation and your right to collect the debt is extinguished.

However, if your HOA filed a lien prior to the owner declaring bankruptcy, you become a secured creditor. Theoretically, this means you are in line to be paid back through the liquidation of the owner’s assets.

We’ve talked before about collecting debt. The above situation is why we recommend filing a lien when owners become delinquent.  It’s simply about protecting the association in the event of bankruptcy.

In should be noted that some states provide automatic liens for HOA debt, but even in those states, many attorneys recommend you still file a lien to put the rest of the world on notice that the property is encumbered by the owners’ debt.

Chapter 13 bankruptcy:

Under this filing, the owner is seeking protection while they try to pay back their debt over time.

However, it’s still in your HOA’s best interest to secure a lien. While you may not be able to collect from the owner personally, you may be able collect at closing if the owners later decide to sell the property. A lien also protects your association if the owners suffer a foreclosure.

Some states give HOAs a lien for six months worth of dues even if the mortgage company forecloses.

The bottom line:

In the event of delinquency, file a lien! It won’t guarantee payment but the likelihood increases drastically.

The most important thing your HOA can do happens even before this. Have a written, and very public policy for delinquencies and stick to it. Make clear that there are no favorites or special circumstances. After all these are your neighbors and likely friends were talking about. Having an official policy in place makes it clear that it’s not personal.

Read More:

Collecting in a down economy

HOAs cut your costs in 2013

Can HOAs buy distressed units?

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

 

 

Get The Most From Your Reserve Study

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We’ve talked a lot about what a Reserve Study is, how to read it and why you need it.

Many HOA boards understand that a Reserve Study is important budgeting and planning tool to help them prepare for future maintenance and repair costs. However, many are scratching their head as to what to do after they get it. As a result, we find that many of our clients are not getting the most out of their study.

Read more: Reserve Studies and California Law

Read more: Reserve Studies – FICO Score for HOAs

Budgeting

At the very least HOA boards should be referring back to the study as they put together their budget each year. However, Reserve Studies typically look about 20 years into the future, allowing boards to look beyond next year’s budget to implement long-term strategies for preventative maintenance programs that can extend the life of building components.

Read more: The Reality of Underfunded Reserves

Preparation

Looking a bit deeper, boards can refer to the study to see exactly which repair and maintenance projects are coming up. This allows you to not only set aside funds, but gives you ample time to start writing specifications, soliciting bids, hiring consultants and raising additional dollars if need be.

Cross-Referencing

Lastly you should be leveraging the information contained in your study to cross-reference bids and/or contracts. A detailed study should include precise schematics and measurements and it often proves worthwhile to double-check this information when dealing with vendors or consultants.

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!

Property Managers: Protect Yourself!

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Over the past 30 years we’ve worked with HOAs and Property Managers to complete more than 17,000 Reserve Studies nation wide. In doing so we’ve learned a thing or two about this unique 3-way relationship.

A Reserve Study is a financial planning tool to help communities identify and prepare for future expenditures. A properly funded reserve, according to a recent Reserve Study, is the best way to protect property values and minimize special assessments.  You can think of it as one part Physical Analysis and one part Financial Analysis.

Read More: What’s a Reserve Study

Tip 1: Assess the Board

The first thing you should do is assess the board you’re working with. You need to understand early on whether you’re dealing a proactive or reactive Board. We know that a properly funded reserve protects property values and reduces the likelihood of special assessments, but ultimately the decision to fund is not up to you. You can only recommend that they follow the professional advice of the Reserve Analyst.

Read More: The Reality of Underfunded Reserves

California Law mandates a Physical Inspection each year and an Assessment and Reserve Funding Disclosure (ARFD) every 3 years. While the law does not require Boards to fund their reserves, it does require that the information is documented and disclosed either way.

Read More: Reserve Studies and California Law

Tip 2: Use Meeting Minutes

So what happens if the Board doesn’t follow professional recommendations?

As a Property Manager, the best way to protect yourself against unjust blame down the road is to denote such decisions in the meeting minutes.

New Board Members come and go and the first thing they want to figure out is what decisions were made before they came on and why. If they find a Reserve in bad shape the first person they tend to blame is the Property Manager. Make sure you can point to meeting minutes that show the conscious decision to not follow professional recommendations. This is the best way to protect yourself.

Watch as our Chairman, Damian Esparza discusses this issue at a recent conference for Property Managers.

 

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!

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!

Reserve Studies: Like a FICO Score For HOAs

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A Reserve Study is one part physical analysis and one part financial analysis. For the last 30 years we’ve helped thousands of clients across the country anticipate and prepare for their community’s major repair and replacement costs. Armed with this knowledge they can make accurate disclosures to homeowners and set their monthly dues accordingly. However, there are other things to consider.

The Devil is in the details

As we all know, the real estate market has taken some major hits in the last few years. As a result, it’s become generally more difficult for home buyers to get the funding they need to purchase a home. Today’s lenders and much more careful to hand out cash. Simply put, the details matter more than ever before.

In our industry we are seeing a common trend: Lenders are starting to use reserve disclosures, particularly Percent Funded, to assess the financial strength of the community you’re buying into. This obviously has a lot of implications – for current home owners, home buyers and ultimately the community or association as a whole.

Watch as our Chairman of the Board, Damian Esparza discusses this issue at recent conference for HOA board members.

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!