It’s important that your Homeowners’ Association has a reserve fund which is being adequately contributed to. But, as the condition of your common interest property doesn’t remain the same, neither should your reserve study. Reserve studies need to be updated to constantly reflect the needs of maintaining the property. To understand suggestions of when to update, we will first explain why a reserve study needs updating and the two types of reserve study updates.
Why update your reserve study?
Guidelines issued in 1991 by the American Institute of Certified Public Accountants state that annual reserve study updates should occur. This is to allow for sufficient budget planning and financial reporting. Governing Documents specify that an appropriate amount of reserves should be collected. If regular updates aren’t done, it can’t be determined that reserves are adequate.
Updating the reserve study regularly allows for more gradual changes to financial requirements. Leaving it for an extended period of time can result in a lot of changes to the plan. This means there is less chance of an unexpected increase in contribution funds required from owners. Many states require annually updated information for disclosure to owners. The reserve study must also be updated should prospective owners request financial records.
Types of reserve study updates
Two types of reserve study updates can be undertaken, once the initial reserve study is in place. First, is the reserve study update without a site visit. This is also referred to as an off-site review and is usually undertaken by a third-party. This is the less expensive of the two options and is generally used more often. The professional considers works undertaken or planned for the common interest property. They also inspect all reserve fund financials such as balance sheets and budgets. The professional then calculates the recommended update to your reserve study. They will not visit the site as part of this process.
Second, is the reserve study update with a site visit. This is the costlier option but is more thorough. The professional visits site for a full physical assessment. They establish the current condition and useful lives of the components. They use this information and a financial analysis to update the funding plan.
When to update your reserve study
To comply with guidelines of governing bodies, annual updates are recommended. Annual updates also represent best practices for board members and property owners. To reduce costs, many HOA’s opt for an annual reserve study update without a site visit.
At least every third year, it is advisable to undertake a reserve study update with a site visit. Consult State Law to establish if this is a legal requirement for your HOA. Leaving it beyond three years, the adjustments to the reserve study tend to be on a much larger scale. This is not ideal. An inadequate reserve fund affects property value and the interest of prospective owners.
It’s best if your HOA agrees upon a schedule of updates at the outset of establishing a reserve study. This allows for a smooth updating process which is not affected by indecision.