Many states now have reserve funding requirements for homeowner’s associations (HOAs) and condo associations. Most of these regulations require a reserve study, which means your Board will eventually need to use this financial planning tool. Reserve studies are often misunderstood.
If your Board is unclear about what a reserve study is and why it is important, this guide is for you. We will tell you everything your Board needs to know about reserve studies.
What is an HOA Reserve Study?
Most crucially, let’s begin by defining the reserve study.
An HOA research study is a professional evaluation of the association’s major common-area components and their expected lifespans. The reserve study does several things, including the following:
- Estimating when each component will need repair or replacement.
- Estimating how much those projects will cost.
- Estimating how much the HOA should be saving each year to stay financially prepared.
The reserve study typically has two parts: a physical analysis and a financial analysis. Your Board will need to use both to develop a sound financial strategy.
Why Reserve Studies are Important
Reserve studies are an essential financially planning tool for every HOA. Most importantly, they enable your Board to pursue proactive financial planning, thereby reducing the following risks.
- Deferred maintenance.
- Emergency repairs.
- Special assessments.
- Increase homeowner dissatisfaction.
Overall, regulatory reserve studies enable the Board to plan for the long-term financial stability of the community, thereby increasing homeowner satisfaction and trust.
How Often Does Your Community Need a Reserve Study
In most cases, your HOA will not need an annual reserve study. However, your Board should always update the reserve to adjust for inflation, completed projects, and funding changes.
However, most experts do not recommend a full reserve study annually. You should plan for a full reserve study every 3-5 years.
Funding Models
There are two main funding models for reserves: fully funded and baseline funding.
- Fully funded: Your Board builds the reserves to cover 100% of future financial obligations.
- Baseline funding: Your Board maintains reserves at some point above zero to minimize special assessments but also reduce homeowner fees.
A good community association management company, such as ACRI Community Realty, can help your Board determine which funding path is right for your HOA.
Common Reserve Study Misconceptions
Many HOA Boards believe that reserve studies are optional, especially when managing smaller community associations. However, that is not true. Even small communities need to schedule a reserve study regularly. Plus, ignoring reserve increases the HOA’s liability and can create a negative impression with lenders and buyers.
How ACRI Can Help
An experienced HOA management company, such as ACRI Community Realty, can help your Board with all aspects of reserve management. Our professional team is well-versed in the following.
- Interpreting reserve study recommendations.
- Integrating findings into your annual budget.
- Communicating funding decisions to homeowners.
- Coordinating reserve-funded projects.
Contact ACRI Community Realty today to learn how we can strengthen your HOA’s long-term financial health.
