It is essential that every group or person responsible for a property conducts a reserve study. A reserve study calculates the potential costs of repairs against funds the capital kept in reserve. This makes sure that funds available to meet any repair costs.
Every person or group responsible for a property should carry out a regular reserve study. But what exactly is a reserve study? And why is it so important?
A reserve study analyzes an entire property. It looks at the structure of the property and any communal equipment. It calculates how much it would cost to repair these constituent parts. It then looks at the money those responsible for the property have in reserve.
A reserve study is fully customized and unique to each property. No two properties contain the exact same damageable goods. No two reserve study studies are therefore exactly alike.
A reserve study consultant visits a property and thoroughly inspects all the items which are likely to become degraded over time. It anticipates how long items are expected to last. It analyzes when repairs are likely to be needed. The reserve study then provides a recommendation for how much money the HOA needs to keep in reserve.
A reserve study can analyze expenditures for as much as thirty years into the future. In some jurisdictions, the law requires a reserve study is conducted every year.
Reserve studies provide property managers and homeowners’ associations with peace of mind. It lets them know that whatever happens, money will be available to meet repair costs.
Unexpected repair costs can cripple a property business. Failing to plan is planning to fail.
A reserve study is also important for people living in a property. It lets them know they are living in a place with responsible management. Nothing can spoil a reputation quicker than unrepaired faults. With a good reserve study assessment, this should never be an issue.
The costs of a reserve study are also generally less than the costs of conducting special assessments. If you’ve not planned ahead, you may suddenly have to calculate the cost of an unexpected repair. A reserve study is therefore well worth whatever initial cost it has.
Who Conducts a Reserve Study?
Accurate reserve studies are provided by engineers who specialize in property management. They have professional qualifications which guarantee their expertise.
You should always make sure that any reserve study is carried out by a suitably qualified professional. This is easy to do, as there are many industry-wide qualifications to look out for. These include qualifications for Reserve Specialists and Professional Reserve Analysts.
Reserve studies are designed to save property businesses money in the long run. It’s therefore important to pay for quality and make sure you are getting the best reserve study consultant available.
In short, reserve studies are carried out by experienced and qualified professionals. They provide a quality of service which it is impossible to achieve without them.
Why a Reserve Study is Essential
We’ve already explained why reserve studies are important. But saying they’re important isn’t putting enough emphasis on the point – reserve studies are essential.
Throughout much of the United States, reserve studies are a legal requirement. In California, reserve studies are required my California civil code for HOA’s. The funds a community association has at its disposal must be disclosed to ownership. This is true for many states. More states are making reserve studies a legal requirement every year.
Boards of directors which don’t conduct reserve studies are neglecting their duties. This can ruin their reputation and even land them in legal trouble. It is a legal requirement that boards display good financial judgment. Their budgets should include any major costs. Repair costs are an inevitable part of any property business. Ignoring these costs is irresponsible.
Conducting a reserve study can also help maintain the value of a property. It ensures the property is kept looking at its best. It keeps a building looking attractive. It improves residents’ daily lives. Properties which don’t have funds to cover repair costs can quickly become rundown.
Reserve studies are also an essential part of planning for the future. Reserve studies can calculate repair costs for as much as thirty years into the future. This provides vital information which can help plan future costs and income. Businesses which are well-planned are much more likely to last a long time.
This future planning can be highly customized. Advanced reserve study software allows you to analyze potential future scenarios. Nobody knows exactly what will happen in the future, so a top-tier reserve study allows you to plan for all eventualities.
How Do Reserve Studies Work?
Every reserve study consists of two types of analysis: physical and financial.
Part One: The Physical Assessment
The physical analysis contains three steps. First, an inventory is made of all items for which you are responsible. The current condition of these items is then analyzed. This analysis is thorough and carried out to an expert level. Finally, the reserve study will analyze both the life expectancy and the value of these items.
The process of a reserve study may begin with a meeting between the reserve study advisor and yourself. During this meeting, the reserve study advisor will ask pointed questions to find out more about the background of your property. This information is essential in analyzing the type of planning that will be needed for the reserve study. Things like how many residents use the property will be disclosed at this initial meeting. This meeting also gives you a chance to express any particular concerns you have. You should tell the reserve study advisor about any existing problems the property may have.
Next, the property inspection begins. The qualified reserve study consultant will carry out a thorough check of the property. If you’ve identified any problem areas, these will be given particular attention. This inspection will include a thorough analysis of everything within the property. This can range from pools to playground equipment and streets. A qualified reserve study consultant leaves nothing to chance. Every element will be considered individually.
The property inspection is usually documented thoroughly with photographs of the current condition of items in the inventory. The reserve study consultant uses the information gained in this property inspection to estimate how long each item will last. They can make solid estimates on how long each item will last. They can also give you vital information on when repairs will be needed. They will also let you know if any replacements should be scheduled.
Part Two: The Financial Assessment
The physical assessment is thorough and unique to each property. Likewise, the financial assessment will be customized to your needs.
There are two main ways in which reserve study consultants can calculate your financial requirements. These are commonly referred to as the Component Method and Cash Flow Method. You may also hear these called the straight-line and pooling method.
Both methods are equally well-regarded. Which one you choose will depend on your own specific needs and the needs of your property.
The Component Method
A simple calculation forms the basis of the component method. The cost of all items in the inventory is calculated. This is then divided by the life expectancy of each item. You will then have a figure for the annual cost of each item.
The component method will result in a reserve fund requirement which varies each year. As items near the end of their life expectancy, they will require a larger portion of the annual reserve budget. This can be useful for some property owners, but it does have an important disadvantage. Because you are reserving an average amount, you may end up with more money in reserve each year than is actually necessary. This can provide peace of mind in some cases, but it can also mean you have to allocate money that could be used in other ways.
The Cash Flow Method
The Cash Flow Method is also known as the pooling method because all a property’s potential costs are pooled together. The Cash Flow Method has several advantages over the Component Method.
Firstly, the Cash Flow Method can use reserve funds in a more efficient way. While each item in the inventory may exceed or fail before its life expectancy, the average should be closer to reality. The Cash Flow Method means you’re less likely to keep unused funds on hand unnecessarily.
The Cash Flow Method is also much more stable than the Component Method. There will be much less variation from year to year. This is a big advantage if you’d like to know in advance what your future expenses are likely to be.
The Cash Flow Method also means you’re likely to have a smaller reserve fund each year. In many ways, the figure provided by the Cash Flow Method is a more reasonable assessment of likely annual costs. By taking an average of all inventory items, it gives you a figure which will be closer to your real repair costs.
For most properties, the Cash Flow Method is the better option. It requires you to keep fewer funds in reserve unnecessarily and is also more likely to match your real costs. However, all reserve study consultants are knowledgeable about both financial approaches. If you believe the Component Method is better suited to you and your property, it is a recognized approach to reserve study planning.
Choosing the Right Reserve Study Advisor
Now that you have some idea of what type of reserve study you require, it’s important to consider who you want to conduct it. You can analyze the credentials of a reserve study advisor in a number of ways. One key factor is their experience level. A reserve study advisor with more experience will provide a more reliable service. They will already anticipate the kind of issues and problems which may be particular to your type of property.
A great reserve study advisor should also be committed to meeting their client’s needs. Make sure you select a reserve study consultant who pays attention to what you say. This can make all the difference when you’re trying to get the best reserve study in place.
It is also best to deal with a reserve study advisor who regularly works in your area. This will mean that the reserve study advisor has local knowledge. The rules regarding reserve studies can vary greatly from place to place. Things like supply and repair costs can also be location dependent. Another advantage to choosing a reserve study consultant who works locally is availability. If the reserve study consultant is working in your local area already, it’s much more likely they will be able to quickly visit you if problems or issues arise.
Some of the professional qualities to look for in a reserve study advisor include their attention to detail and quality control. You can check a reserve study advisor’s reputation online and make sure past clients have been satisfied with their service. You should also bear in mind what was said earlier in this guide about the reserve study advisor asking many questions and being thorough. If your reserve study advisor doesn’t match the expectations of thoroughness you have, it may be worth reconsidering their services.
The best way to find out about the quality of a reserve study advisor is to check their credentials. All good reserve study advisors will have professional credentials. This is a guarantee of the reserve study advisor’s skills and experience. Without the right credentials, you may not be getting the service you deserve.
Other Things to Consider
We’ve broken down the most important points regarding a reserve study in this guide. There are a now a few extra points you may want to consider.
First of all, different organizations may approach funding their reserve study in different ways. We already talked about the difference between the Component Method and Cashflow Method. There are a few other funding strategies that may influence the amount you keep in reserve. One such strategy is Baseline Funding, which means that the reserve fund is projected to reach zero at some point during the reserve study period. In other words, you plan to eventually spend all of your reserve funds on maintenance. This is in many ways the opposite of funding each component fully, which we described earlier as the Component Method of reserve study.
You may also want to consider two more types of funding. Threshold Funding involves maintaining a minimum funding level throughout the period covered by the reserve study. If money is spent on maintenance which takes your reserve fund below the threshold, you should top it up again. Statutory Funding involves keeping the minimum amount mandated by law in your reserve funds. It is similar to Threshold Funding, but it is specifically based on a legally-mandated threshold.
The final thing to consider is that a reserve study is not the only funds you will need for the upkeep of communal areas. A reserve study usually provides you with an expected figure you should fund based on likely repair costs. This figure is usually arrived at assuming your property is properly maintained. A reserve study isn’t a replacement for regular maintenance. You should still make sure all elements in the property are properly cared for and maintained. If you don’t do this, you will be reducing the life expectancy of common elements. It then becomes inevitable that you will exceed the minimum expectations of the reserve study.
A reserve study is a vital part of the duties of any individual or organization charged with property management. In many cases, it should be carried out to strict legal requirements. In all cases, it should be carried out by highly-qualified professionals.
A reserve study is the surest way of guaranteeing the financial future of your property. Failure to properly carry out a reserve study can result in your property becoming worn down and damaged. It can cause long-term depreciation of the property’s value. In many cases, not having the money on hand to pay repair costs may even be illegal.
It is therefore essential that you invest properly in a great reserve study provider. You should make sure you are dealing with highly-qualified professionals who have a track record of happy clients. You should be aware of what is expected of a reserve study consultant. You should also carefully consider your own financial position and decide exactly what type of reserve fund you would like to maintain.
A reserve fund is designed to give property management and residents peace of mind. It should keep everyone happy and reduce the stress that can come with looking after a property. A reserve study can only succeed in these goals when proper care and attention is paid to it. It’s therefore essential that you take the time to choose the right reserve study consultant and get the right reserve funding plan in place for you and your property.