Reserve Studies: Do they matter?

1398366592Why is a reserve study needed?

There are four important reasons to conduct a custom-comprehensive reserve study:

  1. To maintain the property’s value and appearance – By identifying and budgeting for future capital improvements, the property’s common elements continue to look attractive and well-kept, adding to the community’s overall quality of life.
  2. To fulfill the board of directors’ fiduciary responsibility – Board members of community associations have a fiduciary responsibility to their members. Directors are legally bound to use sound business judgement in guiding the association and cannot ignore major capital expenditures or eliminate them from the budget.
  3. To establish sound financial planning and budget direction – A comprehensive reserve study lays out a schedule of major repairs or replacement to common property elements and applies cost estimates to them. To ensure property owners have adequate reserve funding to cover anticipated costs, a reserve funding plan typically spans 30 years. In short, it’s your blueprint for the future.
  4. To comply with state law – Florida Condominium Associations are required to propose a budget showing full reserve funding for roof replacement, pavement resurfacing, building painting and any other expense over $10,000. Many Homeowner Associations also have statutory requirements, depending on the types of reserve accounts they have established.

When and why should associations update their reserve studies?

Reserve studies should be updated every three to five years, depending on changes in your property and whether you are meeting recommended bench mark funding goals. A reserve study update considers local changes in replacement costs, actual and expected dates of replacement, and incorporates any changes in future reserve contributions. These changes can occur as a result of delayed or accelerated projects, extraordinary maintenance, extreme weather, changes in construction methods and materials, and additions and deletions to the property.

Will a reserve study help us with next years’ replacement projects?

Yes, comprehensive reserve studies prioritize upcoming projects and recommend a replacement schedule to ensure that replacement projects are planned and budgeted in an efficient manner. The Board can see at-a-glance, all upcoming projects and allocated costs in one location. Board meetings take less time during the budget process. Evaluation of contractor bids becomes easier, and empowers the board.

How can homeowners find value from a reserve study?

A home is one’s biggest investment, but also poses a potential risk if not properly managed. A comprehensive reserve study should represent a best practice for managing a property year-round, maximizes curb appeal and marketability of a unit to future buyers year-round, while minimizing the prospect of a surprise special assessment at the wrong time.

This Q&A brought to you by Matthew Kuisle of Reserve Advisors, Inc. (800) 980-9881.

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