HOA - The Reserve Study
Congratulations! You bought a new house.Your mortgage, insurance, taxes, and other fees associated with your purchase should fit comfortably within your budget. But, did you remember to add the costs for ongoing maintenance, necessary repairs, and even the replacement of this or that? If you simply assumed that your house, because is new, would not require anything more from you other than to enjoy it, you will not only be gravely disappointed in fairly short order, but end up spending far more dollars than if you had carefully thought ahead more realistically.
Now, imagine that your house also exists within a HOA. You will need to add monthly HOA fees to your budget. Why? Well, just as everything in your house deteriorates, so will the road, sidewalks, lights, and many other common elements in your community. Each owner within the association has agreed to share equally the maintenance, repair, and replacement costs for all common property. So here's the question, how much is your 'fair share’? Does your HOA really know what your ‘fair share’ ought to be? Will you be in for a big surprise someday soon, or has your HOA done their homework?
Budget for 'Entropy'. One of the truisms of life is that all things deteriorate over time and either require constant repair or replacement. Whatever is not well maintained, will deteriorate more rapidly and require even more effort and money to replace. For that reason it is essential for both homeowners and HOA’s to get all the facts so that they may budget for 'entropy' - the constant deterioration of property. A Reserve Study is one such invaluable tool.
The Reserve Study Many states require HOA's to have a Reserve Study completed for their property, with necessary annual visits to keep it updated. Whether required or not, why is a Reserve Study strongly recommended for all HOAs? A Reserve Study:
- informs the HOA board with what they need to know in order to meet their obligations. Knowing and acting on the facts actually lessens HOA liability. Intentionally living in ignorance is irresponsible, though many HOA boards operate with this mentality.
- offers the solid evidence that the board will need when presenting each new budget at the annual meetings where requests for an increase in monthly dues and/or for a special assessment(s) must be voted on.
- actually increases the value of the community and, in the long run, it decreases the likelihood of unexpected special assessments down the road.
Unfortunately, many HOAs have not operated with a realistic budget, so the initial news from the Reserve Study won't always be good news. never-the-less it is best to know the facts and to begin making better financial decisions than to just hope for the best.
There are two important parts to a Reserve Study. The (1) Structures and the (2) Finances. Both need to be carefully analyzed in order to make the most accurate and useful recommendations to the HOA board.
- Inventory. The reserve study will make a carefully detailed inventory of all the various items in the community that the Bylaws require the HOA to maintain, repair, and/or replace as needed. This list differs for each community. It not only may include man-made items such as roofs, doors, and streets, but also the upkeep of trees, bushes, and flower gardens.
- Condition. The study needs to assess the useful life of each 'part'. How long is the expected life of each particular item? How old is the item at the time of the study? How well has it been, or not been, maintained? How does the specific location of each item add to or decrease its expected longevity? How much has poor maintenance shortened the usual life span of the item? Can the item be replaced with an identical part or not? Would a better quality part lower expenses in the future? Will new city codes require a whole new system to be installed when a replacement is needed?
- Funds. The Reserve Study will examine the current ‘reserve’ balance, the sources of income, the rules for increasing monthly fees and for making special assessments, and present as clear a picture as possible of where the HOA stands and where it should be.
- Projections. Based on the analysis of each and every structural item, an estimate is made detailing what it would take to meet the actual costs for operating the HOA according to the Bylaws and when certain items need to be replaced or refurbished. The end result should make clear what the HOA board must accomplish each and every year to not fall behind in property maintenance. It will also specify what increases will need to be made on monthly HOA fees and if a series of special assessments will be required.
A Final Note All this being said, the members of your HOA may decide not to spend any money on a Reserve Study, or to reject the results of the study. If that is the case, maybe it would be wise to consider relocating to a different community where property maintenance is a HOA value.