Making sure the HOA’s finances, including future expenses, are in order is one of the board’s primary duties. A reserve study is the finest technique to accomplish this goal. A reserve study is a valuable tool for long-term budget planning for capital. It may also be used to evaluate and appraise an association’s real estate condition.
If your association is considering evaluating the asset’s expenses, a reserve study is a must. Here is a complete guide to help you understand the basics of the reserve study.
Purpose of Conducting Reserve Study
As mentioned above, the main goal of a reserve analysis is to examine HOA’s components to predict when assets will need to be repaired or replaced. Typically, you need a thorough reserve study to calculate the maintenance cost.
It is a form of comprehensive analysis in which the board of directors assesses the overall strength of reserve funds. The study enables the board members to predict the amount of money required to maintain the association without the need to levy special assessments or secure outside funding. The results of the reserve study are crucial as they help the board fund reserves.
Moreover, reserve analyses are essential for assisting the board in preventing financial emergencies in the HOA. The HOA will prepare appropriately and won’t have to seek special financing to address the issue when that significant expense eventually arises. Instead, they will use the reserve funds to pay for significant costs.
In short, reserve studies are essential for establishing equality between present and prospective association members. For instance, if current association members use the HOA’s physical assets, such as a pool or the clubhouse, they are causing damage to the property.
Understanding the Basics of Reserve Studies- How It Works
The operational and reserve funds are typically the two funds that make up a homeowners association. The association maintains the operational fund to cover ongoing costs and upkeep, such as vendor invoicing and monthly expenses.
The reserve fund serves as the HOA’s savings account. The money in this account is used to pay for current repairs and anticipated future expenses for the association. If an HOA’s funded reserve falls below 70%, they run the risk of raising association dues to meet costs or conducting special assessments, which places an unfair burden on homeowners by requiring them to come up with cash quickly.
To prevent such a situation, the board must carefully plan and prepare for unforeseen expenses. The association will ideally have a fully funded reserve from which to draw when unexpected expenses arise in the future.
Summing Up
A reserve study is an essential tool you can utilize to protect your homeowners’ association’s financial stability by ensuring that the association’s reserve fund is appropriately managed. The reserve study aims to determine the current state of an association’s reserve fund and develop a strategy to help the association out.
While reserve study is a valuable tool for the association, it takes work to conduct. Make sure you hire a management firm such as David Bach & Associates to benefit from their expertise for the reserve study.
