HOA Reserve Study

Reserve studies help Homeowner's Assocations plan ahead by telling them how much money they need to save each year.

What is a Reserves Study?

A reserve study is a report created by a reserve study company to determine the amount of money the HOA needs to set aside each year for future maintenance.

Buyers receive the reserve study as part of their HOA Document Disclosures in escrow. Buyers can review the report to gain insights into how well funded an homeowners association is (or is not).

When is a Reserve Study Required?

According to the Davis Stirling Act condominiums and developments with a Home Owners Association, regardless of size, are required to conduct a reserve study every 3 years. Sometimes for small associations of 10 units or less, they may not conduct a reserve study as frequently because of limited resources. 

Why get a Reserve Study?

Associations are responsible for maintaining the common areas. Because routine maintenance schedules are hard to estimate and vary widely from year to year AND the board is made up of volunteer elected officials that are property owners in the development (not real estate experts)- it makes sense to get some outside help for this. Responsible reserving “smooths out” the big-ticket items, that, if not planned for, can give the association’s budget a real shocker one year!

Some examples of notorous ‘budget busters’ are roof replacement, elevator replacement, exterior painting, exterior re-stucco, replacing all the balconies, updating community amenities like pool plastering, tennis court resurfacing, gym remodel, lobby remodel etc). For these big-ticket items, it can the HOA several years to save enough funds.

Made-up 30 Year Maintenance Schedule

Maintenance expenses aren’t a straight line (unlike Depreciation)- they go up and down every year. Some years the HOA may be required to spend hardly any money at all, while other years the expenses can come rolling in to the tune of $10,000’s for small associations $100,00’s for medium size buildings, and Millions for large complexes. A reserve study averages out all of those expenses so that you can set aside a more manageable small chunk each year. In a 100 percent funded model- think of that as setting aside an equal amount of reserves to the deterioration that occurred that year to the common areas. 

HOA Reserve Study Template

How to Read a Reserve Study Report:

The 3 main things I lookout for are in a reserve study are:

  • The Percent Funded
  • Recommended Additional Contributions
  • The Component List

What is a good or bad Percent Funded?

A percent funded of:
0-15% is VERY WEAK
16%-30% is WEAK
31%-40% is FAIR
41%-50% is STRONG
and anything over 50% is VERY STRONG
100% is FULLY FUNDED

Why don’t I ever see 100% funded in the marketplace?

The HOA boards decide how they want to run the building. A building will look nice or run down depending on how old it is and how much deferred maintenance. In regards to maintenance, there are two camps:

Camp 1: Most of the time newer owners who paid higher prices. They want to reinvest into the building with upgrades improvements to raise prices.

Camp 2: Owned in the building long term and want the lowest monthly HOA dues possible, which means deferring more maintenance. 

The time to replace something is when the annual maintenance cost would purchase a new unit for the same cost. If you were to follow a 100% Fully funded that would be no deferred maintenance, which means replacing things before they break down. In reality the useful life of any component can be extended with property installation,  property maintenance, and careful use. I see most homeowners capping at at 50%. At Over 50%- in my opinion it is starting to get out into too many future years. I can see exceptions for luxury communities where HOA dues a very small relative to property values. 

Don’t judge a Reserve by its Number

While the contribution to the reserves should always be the same, the number of the reserve account may be misleading. It is safe to say the more money in the reserves the better, but just because the reserve has a low balance doesn’t necessarily mean that the HOA is underfunded.

Here’s an example:

Let’s say that there is a building with a roof that has a 10 years useful life and it is brand new. It has an estimated replacement cost of $30,000. The HOA makes a $3,000 contribution to the reserve each year. This would be a 100% Fully funded model:

As you can see from this example “fully funded” does not mean that you have $30,000 in reserves for the roof today. The reserve balance for Fully funded changes every year. So the number of reserves should be considered in light of the fully funded percentage to give an accurate picture of the health of the reserves. When a building has just underwent several major improvements, they will likely not need as much spending in the immediate future.

Scanning through the Componet List

The Component list is a list of all the individual parts of the building that deteriorate and require replacement.

There is a 4 part test to be considered a Component

  1. Must be part of the common area
  2. Must have a limited life
  3. Must have a predictable remaining life
  4. Must be above a minimum cost significance threshold (Reserves are more for Capital Expenses and not routine maintenance which is accounted for in the operating budget)

Small buildings will have smaller component lists than bigger buildings (and smaller budgets too!). For Small buildings expect 30-40 components, medium buildings 50-100 components, and large buildings components in the hundreds.

I quickly scan to see which components have the shortest useful life (meaning replacement is coming soon) and how much they cost to replace. If you see a bunch of expensive components that are in low single digits or zero you can expect special assessments coming your way in a year or two if the HOA has a weak reserve.

What are the risks of a building with Weak Reserves?

The main risk of low reserves is that the HOA will need to levy a special assessment. the next time something breaks. When it breaks it breaks and it needs to fixed. If the HOA doesn’t have enough money in the bank to pay for it they have to go to the property owners to raise more cash. For very large expenses if the HOA is sound, they can usually obtain financing. Banks will not lend to an HOA with a 5% HOA dues delinquency rate or higher. Many owners like the option of financing. They like to be able to choose from paying off the assessment all at once or assume the financing.

What should I expect for reserves in Los Angeles?

The majority of condo buildings in Los Angeles fall into the 25% – 40% FAIR category for reserves. In tough economic times it is common to defer maintainance, and during econmic booms to make capital improvements. Smaller buildings usually have weaker reserves. 

How much does a Reserve Study Cost?

Reserve Study Companies:

Vigen Onany
818-957-8195
2535 Foothill Blvd Suite 101
La Crescenta CA 91214

Association Reserves
www.reservestudy.com
800-733-1365
6700 Fallbrook Avenue #255
West Hills CA 91307

RSI (Reserve Studies Inc)
800-485-8056
9420 Topanga Canyon Blvd #201
Chatsworth CA 91311

Barrera & Co.
800-543-8670
2207 Garnet Ave Suite H
San Diego CA 92109

McCaffery Reserve Consulting
858-764-1895
340 Paseo Pacifica
Encinitas, CA 92024

Strategic Reserves Corporation
951-693-1721
28690 Old Town Front Street, #350
Temecula CA 92589

Complex Solutions LTD  (LOW COST- great for Small HOA’s with a limited budget)
888-356-3783
PO BOX 2562
Camarillo, CA 93010

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