HOAs should have a reserve study regularly to determine how much funds they need for projected repairs and replacements. Board members should therefore create a plan for funding their reserves. One issue that affects most HOAs is underfunding their reserves. A reserve study should be conducted to ensure enough funds in the reserves.
What is a reserve study?
This is a budgeting tool that allows HOA to plan their funds to cover replacements costs of communities' physical property.
Why a reserve study?
A reserve study aims to analyze an association's components to determine their life expectancy and the costs required for repairs and replacements. HOA board directors can also determine the capacity of their reserve funds through a reserve study to come up with a funding plan. These funds can keep the community’s common elements in good condition without special assessments.
Future HOA can benefit from reserve studies because the existing reserve funds can be used to repair the physical property in the coming years. When a reserve fund is well-maintained, HOA will avoid taking debts to cover emergencies.
What are deterioration costs?
Deterioration costs are funds used to cover aged association assets that need replacement and repair. The number of assets determines how much the deterioration cost will be. Inflation can raise the deterioration costs; hence an HOA should properly and adequately fund a reserve fund to avoid extra expenses.
Reserve fund funding
There are two kinds of funds to be covered by HOA;
Operating fund - The HOA is responsible for the operating fund to cover recurring costs. These cover monthly expenses.
Reserve fund - What is a reserve study reserve fund? These funds should be treated as savings to be used for future repair costs. To avoid burdening homeowners with unexpected costs, a reserve fund should be more than 70% of the projected replacement costs.
Maintenance and Reserve expenses
Maintenance expenses are covered by the operating budget, considering maintenance is an ongoing budget for an asset. Alternatively, reserve expenses are taken from the reserve fund and used to extend the lifetime of common assets.
How much should an HOA have in a reserve fund?
Associations should use cash flows to determine their reserve funding plan. However, it is pretty challenging to have a specified figure considering the impact of inflation and the linearity of cash flows.
What is a percent funded?
Percent funded refers to the ratio of a reserve balance (actual or projected) to the fully funded balance at the start of a fiscal year, in percentage. Percent funded is calculated by comparing the collected funds to the HOA reserve fund target.
How often should you conduct a reserve study?
HOA should have a reserve study regularly over the years. An association's amenities need to be evaluated by a professional reserve study specialist to determine their condition. Certified trained specialists should carry out reserve studies.
How much does a reserve study cost?
There are three key determinants of how much you will pay for a reserve study. Property size, location, and complexity should be on top of the list. If your property is closer to the inspector, you will not have to pay travel expenses. The number of stories, the intensity of repairs may also guide you on pricing.