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Reserve Studies – What Are They and Why Are They Needed for HOA Communities?

Do you plan on retiring someday, or do you plan on working forever? Most people would indicate they are planning to retire. After all, who really wants to work their entire life?

However, to make that retirement dream a reality, what do you need to do? Obviously, you put money away, but how do you know how much money you need to save to realize your retirement dreams? If you don’t consider such factors as (1) how many years you are away from retirement, (2) what level of comfort you want to retire into, or (3) what the future cost of living will be at the time you’re ready to retire, how can you be certain you’re saving enough to realize your retirement dreams? Generally, people consult with Financial Advisors to assist them with answering these questions, and provide them with a “blue print” of how these individuals need to save to realize their retirement dreams.

Reserve specialists are very similar to financial advisors. Reserve specialists establish what the community assets are, how long each asset’s “life expectancy” is likely to be, and establishes the anticipated cost of replacing those assets at the end of the asset’s expected life cycle. With this information, the reserve specialist establishes the dollar amount the Homeowners Association should set aside annually in savings for the future replacement of these assets as they “wear out.”

While the Board of Directors or even ad hoc committees can “establish” the annual dollar value of savings to make the necessary future replacements, on what are these “guestimates” based? The failure to consider all the community’s assets, accurately determine how many useful years remain for each asset, and having a rational and realistic (mathematical / financial) method of determining the future replacement costs of these items will, in no uncertain terms, lead to future “Special Assessments” that are damaging to the property values within a community.

How damaging can special assessments be? There is a community in Parker that didn’t plan adequately for the future (i.e. they didn’t save enough each year for future asset replacements). When it was time to paint the buildings, re-shingle the roofs, and complete irrigation upgrades, this community had failed to accurately prepare (through savings) for these very expensive costs. Consequently, each home owner within the community was “hit” with a special assessment of over $5000 (due in lump sum, immediately) “and” their dues were increased significantly to pay for the loans that were necessary to pay for the repairs not covered by the special assessment.

While this community’s home owners were working towards approving this special assessment, which took a couple of years due to the complexity of these assessments, these homes continued to exhibit continued wear and tear. Home values within the community (which had been entirely owner controlled / managed for about 10 years), plummeted. Owners who were purchasing homes within this community during this time were not aware of either the pending special assessment or pending dues increase (because legislation had not yet passed requiring the community to provide Board meeting minutes). Even after the repair work has been completed to these homes, this community hasn’t fully “bounced back” from the reputation they received for their lack of planning. While it’s difficult to say with certainty, it very well may be that it was this community that contributed to the legislation now in place requiring the disclosure of Board of Directors meeting minutes to ensure prospective home owners are aware of the financial condition of the community they’re considering.

While it’s easy to say, “Well, I’m only planning on owning here for a few years, so what should it matter to me if the HOA plans for the future?” While you’re living within the community, are you getting the benefit of a good roof? How about using the common green space of the community? Are you walking the sidewalks? Driving the streets? Shouldn’t you be paying your fair share, now, for the wear and tear you’re placing on these common elements? Don’t you want your home’s next owner to find your community attractive because you’re planning for the future with the help of a professional reserve specialist?

There are many savy purchasers out there. If they don’t see a reserve study for a community, or they don’t see enough funds being placed in reserves, they’ll look for a community that is looking out for the benefit of the whole community, now and for the future. Yes, they want a good value and to see a community that is well cared for, but they also expect a community that has a financial road map for the future, similar to a successful retirement plan.

Because so many communities are failing to adequately provide for future replacement costs of these communities’ common elements, states are recognizing the need to legislate that HOAs must have a professional reserve study in place, and updated on a regular basis. Even the Colorado legislators have entertained this discussion just this year. Do you want your HOA to be forced to plan for the future, or do you want the Board of Directors to look to the future and make sound financial decisions for the community as their fiduciary duty requires?

A Professional Reserve Study that is updated regularly is truly a necessary tool for all communities that own any common element property. It is a great way to protect your biggest investment (your home), today and tomorrow.