HOA reserve study: Ensuring your budget's success
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What are HOA reserves?A reserve fund is a community savings account that serves as a cushion — protecting your association’s finances from the burden of necessary future expenditures. By design, a reserve account grows over time through regular funding from a percentage of your association’s dues.
A reserve study assists with an association’s long-term financial planning by considering the current status of the reserve fund and determining a regular funding contribution that will offset ongoing wear and tear and achieve future community enhancements. The reserve study is comprised of two parts — a comprehensive physical analysis of the current condition of your community’s assets and a detailed financial analysis.
Both the reserve fund and reserve study are critical components of the budgeting process that help ensure the long-term financial security of your community.
By partnering with an experienced property management company like FirstService Residential that knows effective reserve funding strategies, your board can properly plan for these eventualities and avoid, as much as possible, having to impose special assessments.
Association reserve funding benefitsThe key to protecting the fiscal health of your community is committing to consistently funding your HOA reserves over time. By doing so, your association will realize three distinct benefits:
- Peace of mind - A reserve fund gives association members greater confidence and comfort in knowing the money will be there when needed.
- Market value preservation – When reserves exist to support shared assets in a community, the market value of properties within that community is better maintained.
- Equitable cost participation – One of the main advantages of establishing and maintaining HOA reserves is that it ensures all residents using and enjoying community assets contribute to their costs. Without reserves, a special assessment may be needed where only those residents living in your community would be impacted when an asset needs to be replaced. By funding reserves over time, you can ensure that generations of owners share in the costs of assets.
Are HOA reserves required?Your governing documents will detail if a reserve fund must be established for your community. Some states require fully funded reserves. Those documents will also outline what procedures must be followed for contributing to your reserves and if funding can be postponed or sidestepped if most of your residents agree to it.
A good property management company will offer sound guidance on establishing and maintaining funding for your reserves. At FirstService Residential, we believe HOA reserves are an essential component of community support for successful, long-term financial planning.
The importance of an HOA reserve studyIt can be challenging for a board to identify all the items in its community that will eventually need the support of reserve funds, such as when those items will need to be developed, upgraded, or replaced and how much it will cost. That’s where the reserve study comes in.
By assessing the condition of common-area assets within your community (like clubhouses, lobbies, and pool areas), identifying future replacement costs, and recommending an annual contribution amount for the reserve fund, the study can better position your board and community for long-term financial success.
At FirstService Residential, we highly recommend that you enlist the services of a third-party professional, such as a reserve specialist, to conduct your reserve study. These pros thoroughly understand all the assets in your community that should be considered and if/when they should be added to your reserve inventory.
They will also have intimate knowledge of your state’s requirements regarding reserve funds and studies. And most importantly, they will offer your board an unbiased and sometimes much-needed voice in your budgeting process.
If you need help identifying a reserve specialist in your area, reach out to our teams at FirstService Residential. Our verified vendor lists help us connect communities with licensed and insured vendors who can provide the exceptional service they need.
Treating your reserve study as a living, breathing document that should be regularly reviewed and updated is essential. We highly recommend sitting down with your reserve study analyst to determine the best direction for your community. Your old reserve study might quote a new roof at $1 million. However, since that was five years ago, with inflation, the current cost could be $1.3 million, drastically affecting your reserves.
For newer communities, the suggested cadence is every three years. After a decade of existence, communities should consider updates every other year, and detailed reviews of the study should occur annually. Again, your state may dictate your schedule for reserve studies, and your property management company should be able to provide this information to you.
In addition to updating the reserve study, it is important to speak with your analyst to ensure the accurate life span and repair costs of your building’s assets and not assume that preventive maintenance will extend it. “You might think you can get a couple extra years out of your roof, but the analyst would help show you the entire picture versus only surface level. Something may initially seem to cost $10k to replace, but additional labor and material costs need to be factored in which can result in a much different number. This is a great example of why the guidance of a professional is so valuable,” said John Lee, Vice President at FirstService Financial.
Determining maintenance vs. reserve componentsProperly categorizing your community’s common area components is one of the challenges of managing reserves. Some items will require regular maintenance, such as pressure washing sidewalks and window cleaning; others will need to be replaced, like roofs and mechanical equipment, and still others will require both, such as pools and carpeting.
You must budget for yearly maintenance costs to ensure your community components will last until they are due to be replaced. If you don’t, you may have to replace them before the reserve study’s replacement due date, impose a special assessment, or take out a loan. At the same time, you must make a reserve contribution each year to be properly prepared to cover replacement costs when scheduled.
Deciding whether items are maintenance vs. replacement (or both) will ultimately determine if they will be listed in your annual operating budget or as part of your reserve inventory. Usually, less expensive items are included in the operating budget, and costlier items are assigned as reserve components so their replacement costs can be financed over a longer period.
If you need help determining whether an item should be included in your operating budget or reserve inventory, consult your auditor or property management company.
For more information on the difference between routine maintenance and capital projects, read our article Maintenance and Repairs vs. Capital Improvements – What’s the Difference?
More and more associations, especially for communities that are decades old, are starting to address infrastructure components as part of their budget planning process. These are components that last a very long time, are generally out-of-sight, and, as such, are not often thought of — like sewers. A good practice to follow is to add infrastructure items to your reserve components list when they reach the halfway mark of their expected life spans.
As your board takes on the responsibility of budgeting for your association, rely on your reserve fund and reserve study. They are indispensable tools that can help keep your community’s long-term financial plan in check.