Friday August 12, 2016
Your HOA’s reserve fund is an important element in planning for your community’s future. In fact, it may even be the most critical piece of your budgeting, according to Dan Henein, vice president of client accounting at FirstService Residential. Henein explains that “long-term, the reserve study has a tremendous impact on your association’s fiscal health.”The purpose of a reserve fund is to enable your HOA to undertake costly projects—like installing a new roof or purchasing equipment—by predicting needed repairs and replacements. Most HOAs hire a specialized firm to develop a reserve study that identifies a stable plan for funding an HOA’s reserve.
However, boards sometimes disagree with the findings of their reserve study. They may decide to ignore those findings and take their own approach—a decision that Henein doesn’t recommend. “When this occurs, the board is not fulfilling its fiduciary responsibility of relying on its experts,” he says.
On the other hand, that doesn’t mean that you can’t question a reserve study. “Too often, board members take the reserve study at face value,” says Rodney Riepenhoff, director of engineering for the West Region of FirstService Residential and corporate engineer for FirstService Association Consulting. “They don’t realize they can ask for hard data to give them a better picture of the condition of their equipment and amenities.”
Since it’s usually financial professionals—rather than engineers—who develop reserve studies, their estimates are generally based on the date of installation and the replacement costs. This assumes that assets will reach their maximum useful life, which isn’t always the case. A good reserve study firm should also consider the actual condition of the item and how well it’s been maintained.
Finding the right reserve study firm for your HOA may seem like a big task, but your community management company can provide recommendations. The steps below can also help you make the right decision.
1. Gather information for your prospective firms.
Reserve study candidates will first need to have background information about your association. Put this together in advance, including your community’s location, its makeup (single-family homes, high-rise buildings, etc.), the number of units in the community, a description of the structures, and a list of your amenities.
2. Identify all your potential candidates.
Your community management company can provide this list. You may also want to ask the Nevada chapter of the Community Associations Institute (CAI).
3. Put together a list of questions.
Some of the questions you should ask include:
- How many years have you been in business?
- How many reserve studies do you create each year?
- Do you have experience with similar communities?
- What do you charge to do a reserve study?
- How do you conduct the physical analysis of our assets?
- How do you conduct the funding analysis?
- How long will you take to complete the study?
- What role do you expect our board to play?
- What kind of guarantees do you provide?
- May I see some of the reserve study reports you have created?
- Can you provide three references I may contact?
With your questions in hand, interview each candidate and take detailed notes. Feel free to tweak your questions or to ask additional questions as you progress through the interviews. Just make sure you also go back to earlier candidates with your new questions.
5. Evaluate your candidates according to your criteria.
Once you have completed your interviews, you’ll want to conduct a thorough comparison. The best way to compare apples to apples is by creating a spreadsheet. Label columns with the names of your candidates, and label rows with your hiring criteria (your questions). Fill in information based on your interviews.
It’s also a good idea to ask your accountant to look over the sample reserve study reports to make sure they contain everything you need to comply with federal filing requirements. Eliminate candidates who either don’t meet your criteria or your accountant’s.
6. Contact references.
Once you have narrowed down your list to a few candidates, get in touch with their references. Find out when their study was done, how long it took, whether it was done on time, if the HOA was happy with the firm’s work, and what could have been done better. Also ask whether they considered other firms, how they decided on this one, and whether or not they’d hire the company again. Be as brief as possible and respectful of their time.
7. Make your informed choice.
Congratulations—you’ve done your homework! Now that you have all the information you need, you can choose the best firm for your HOA.
Hiring the right reserve study firm can help to ensure a bright financial future for your HOA. FirstService Association Consulting can offer assistance in reviewing your reserve study. For further information on how to find a reserve study company that meets your needs, contact FirstService Residential, Nevada’s leading community management company.