Whether you are a member of your Homeowners Association’s board or are a property management professional tasked with revenue management, you know just how challenging it can be to manage a healthy and future looking reserve fund. Fortunately, an HOA reserve study can provide you with insight that will guide financial decision-making.
With that being said, it is vital that you select the right HOA reserve study provider. Choose wrong, and the financial consequences may be severe.
In order to help, our experts have created this in-depth guide to HOA reserve studies. We also discuss three things to know before hiring a company to conduct your HOA reserve study so that you can make an informed decision.
What Are the Fundamentals of a Reserve Study?
Before scheduling your HOA reserve study, it is important to note that every study has two core components, which are as follows:
- Physical analysis
- Financial analysis
During the physical analysis, the study provider will conduct an extensive review of the property in question. They will create a comprehensive component inventory and assess the conditions of each asset. The provider will then generate estimates of each component’s current value and projected life expectancy.
An experienced consultant will identify critical repairs and deficiencies. They will not only include them in the budgets but will also provide various options to complete or correct deficiencies.
After the physical analysis is complete, the HOA reserve study provider will conduct a financial analysis. They will assess the status of the existing reserve fund and forecast the future capital replacement needs of the facility, including adjustments for inflation (which has a huge impact right now).
How to Plan a HOA Reserve Study
When you’re planning your HOA reserve study, the most important step is to set clear expectations for the provider. Specifically, every HOA should expect the following when partnering with a reserve study provider.
1. Your HOA reserve study provider should carefully review HOA covenants and hold discussions with the property manager. This approach allows them to establish which fixed assets in your community are included and which are excluded from the reserve study.
Individual homeowners take responsibility for some things, the HOA for others. It’s imperative that your Reserve Study provider (RS provider) knows the difference.
2. The property manager (or key members of the HOA) should have a voice in determining the projected dates and replacement costs of the community’s fixed assets.
This voice requires that the RS provider engage the property manager or key members in discussion regarding their intentions for future replacements and the HOA’s ability to fund such replacements.
Often, many non-critical replacements can be deferred a few years to create a funding model that’s feasible for the HOA without creating the conditions for significant additional damage to the property.
3. A Reserve Study provider experienced in construction trades will identify critical repairs, deficiencies, and poorly executed construction details. They will alert the property manager of these defects and will suggest options for remediation.
4. Most importantly: Funding models and financial projections that HOAs use to establish their annual budgets and capital fund contribution rates are wholly dependent on the quality of the data in the expense section of the reserve study. As the saying goes: Garbage in — garbage out.
Suppose your reserve study provider significantly under- or overestimates the community’s expenses. In that case, it could mean over-taxing the homeowners, or worse, under-funding the capital reserve account, leaving the community unable to fund future capital needs. The accuracy of the data input is critical.
What’s the Difference Between a Reserve Study and a Property Condition Assessment?
On occasion, HOA members or even property managers may use the terms “reserve study” and “property condition assessment” interchangeably. While similar, these two terms refer to distinctly different processes.
A property condition assessment, also known as a “facility condition assessment,” is an analysis of a facility’s general condition. During this type of assessment, the engineer considers factors such as age, design style, materials used, and construction methods.
Conversely, an HOA reserve study is used for long-term financial management purposes. This tool can examine the current state of a facility’s reserves and provides a plan to fund future major repairs or replacement expenses.
What to Know Before Hiring an HOA Reserve Study Provider
While the expectations outlined above are a great starting point when selecting an HOA reserve study provider, we also recommend asking them at least these three very specific questions. Before hiring a reserve study provider, you should know things such as:
1. What Level of Service Do They Provide?
Reputable HOA reserve study providers almost always offer various service levels to fit the needs of all clients.
When consulting with a prospective provider, make sure to ask what HOA reserve study options they have. You should also inquire about the difference between the choices so that you can select the most suitable service for your neighborhood.
2. Will They Clearly Communicate All Findings in a Detailed Report?
You should also ask an HOA reserve study provider how they will relay the findings of their analysis. While virtually all study providers will prepare a “final report,” these documents vary greatly in terms of scope and quality.
Therefore, you should ask what your report will include and also find out how long it will take to receive those documents.
3. How Much Experience Does the Consultant Possess?
Finally, you should find out how experienced the consultant conducting the field assessment will be. The accuracy of your HOA reserve study hinges on the experience level of the person performing the analysis. Ideally, you want the study to be performed by an engineer with at least 20 years of directly related experience.
A great way of gauging a consultant’s experience level is to review case studies on past projects that they have completed.
zumBrunnen: A Prompt and Accurate HOA Reserve Study Provider
Does your Reserve Study provider have the construction experience necessary to understand what they’re looking at when they evaluate complex properties? Will they spend the time to talk with you about their findings?
Will they meet with you and the board or subcommittee to explain their observations and conclusions to help you digest the Reserve Study so that it can be used as an actionable planning tool for the HOA?
Do you want to be able to confidently answer “yes” to these questions? Then zumBrunnen is your only option. Contact us now for a proposal.