Does My Association Need a Reserve Study?
Few things are more frustrating for your association than dealing with unexpected repair and replacement costs. Repairs and replacements can eat away at your carefully-budgeted association funds, so it’s important to budget for these things. That’s why we recommend that you schedule a reserve study. Here’s what you need to know about reserve studies and if you should schedule one for your COA.
What is a Reserve Study?
A reserve study is a financial planning tool meant to anticipate repair and replacement costs as accurately as possible. Condominium associations incorporate reserve studies as part of their long-term budgeting strategies. While every reserve study is a little bit different, there are three main costs these studies look at:
- Major repairs
- Major replacements
- Upgrades for communal items
Reserve studies analyze the lifespan of various elements of your communities that could potentially need repairs or replacements. Then they estimate the cost of each repair, replacement, or upgrade. For example, if your association has a pool, at some point the filtration system may need to be repaired. While this isn’t an emergency repair, if your members have to wait around for you to gather the funds to make the repair, they won’t be happy about it, especially in Florida’s hot summers.
Another example of a cost that’s accounted for in a reserve study is a roofing replacement which is more expensive and crucial than a pool repair. You want to be prepared for the expense which is exactly what a reserve study helps with.
Knowing approximately how much you’ll have to spend on these items and when you’ll have to spend it goes a long way to helping you manage your association funds wisely. It also means that your unit owners won’t have to wait long for the repair to be made.
Why Do Reserve Studies Matter?
If you’re regularly having reserve studies conducted for your association, you’ll be able to budget more accurately. This helps you avoid having to apply for a loan or get a special assessment when big expenses come up. In theory, you will already have budgeted for them using the results of the reserve study.
Reserve studies are beneficial for other reasons besides budgeting as well. They allow you to obtain expert advice on repairs and replacements that you may not know much about yourself. If you’re a board director, it’s your responsibility to make expertly informed decisions. Reserve study firms have worked with many associations, oftentimes over the course of many years. This makes them a fantastic resource for your HOA or COA! You may not know how long your pool filtration system is expected to last but when you use the expertise of a reserve study firm as a guide, you’ll have all the info you need from the experts.
Reserve studies make sure that your community is maintaining a high level of value for all your members. They keep the satisfaction of current unit owners high and help attract new members. Just knowing that an association is conducting a reserve study on a regular basis to maintain the community is a bonus to many people who may want to live in your association.
Because a reserve study is conducted by a neutral third party, it’s a great tool for getting all unit owners, the board of directors, and the property managers on the same page. Rather than some people insisting certain work needs to be completed and others saying there should be more time before it’s done, the results of the reserve study can help you make the final decision.
Best Practices for Reserve Studies
Reserve studies must always be conducted by a third party who has no financial interest in the outcomes of the study. This ensures a smooth and accurate reserve study. Although every community is different, a general rule of thumb is you should get a reserve study done about every three years.
While different states have different rules regarding associations and reserve studies, the state of Florida does not require HOAs or COAs to conduct these studies. However, all communities must submit a comprehensive budget to the state, including their reserve schedule. If you want to ensure the reserve schedule is accurate, you’ll want to have a reserve study conducted.
You can usually expect a reserve study to take weeks to finish. Although the size of your community will help determine how long the process will take, a good estimate for a reserve study is six to eight weeks. That being said, it’s probably not a good idea to simply schedule your reserve study eight weeks before you’re going to finalize your budget. Remember that most associations will be operating on approximately the same schedule, making the summer and early fall the busiest times for reserve study firms.
Because of this, it may be in your best interest to book your reserve study at the beginning of the year right after you closed out the previous fiscal year. This will make sure you have plenty of time for the study ahead of your budgeting. You’ll also have ample time to ask questions about the results or even request revisions of the reserve study.
The cost of reserve studies can vary widely. However, they do cost so make sure you are doing your best to factor them into your budget. In the long run, they will actually save you money, so think of them as an investment.
Protect Your Association’s Bottom Line with a Reserve Study and LM Funding
Just like you may not have certain repairs and replacements factored into your budget, you probably don’t have collection-related legal fees and costs budgeted either. If you have a special assessment on the horizon, there is even more reason to keep this top of mind. Just like a reserve study is a preemptive measure you can take to protect your finances, working with LM Funding is a preemptive measure that protects you from suffering due to delinquent fees.
LM Funding cares about protecting your association’s bottom line. To learn more, get in touch with us today!