An HOA reserve study is important in an association’s budget planning process. This study contains valuable insights into an HOA’s financial health and reserve requirements, informing the board’s decisions.
What is an HOA Reserve Study?
A homeowners association reserve study comprehensively analyzes a community’s finances and assets. It involves examining the association’s current reserve fund and inspecting its physical assets. This inspection determines the estimated useful life of each component and calculates the cost of repairs or replacements.
The purpose of a reserve study is to prepare the HOA for future financial obligations. It estimates how much time is left for each physical asset and how much it will cost to repair or replace them. From there, the analyst will come up with a funding plan, dictating how much the association will need in its reserves to pay for these costs and how much it must set aside every year to meet this requirement.
With a reserve study, associations would have a chance of knowing when their physical assets will expire and how much they will need to pay for the repairs or replacements. All of this would come as a surprise, forcing board members to significantly raise dues or collect hefty special assessments to meet financial obligations.
Components of an HOA Reserve Study
There are two components of a reserve study: the physical analysis and the financial analysis.
The physical analysis of a reserve study involves inspecting the association’s physical assets, which usually refer to the common areas and any element that the association is responsible for. It considers the inventory, the physical condition, the life estimates, and the valuation estimates. This portion of the study also includes estimates of the cost of repairs and replacements.
The financial analysis of a reserve study involves a detailed review of the association’s current reserve funding. It determines how much the association will need to set aside in its reserve account to meet the costs of repairs and replacements brought on by deterioration. It includes a funding plan that helps ensure the association has the funds necessary to pay for these expenditures.
What Should an HOA Reserve Study Include?
Although a reserve study consists of two major components, several line items must appear in a thoroughly prepared study. As such, associations should hire a reserve study company that employs industry experts, including engineers and accountants who have experience dealing with HOAs. It is also a good idea to look for CAI-accredited professionals.
According to the Community Associations Institute, a reserve study must include at least seven items. These seven items will guide the association in budget planning and financial preparation.
The seven items to include in a reserve study are as follows:
- A summary of the reserve fund financial status of the association as well as the association’s physical description and number of units
- A projection of the starting balance of the reserve account, recommended contributions, anticipated reserve expenses, and the anticipated ending balance of the reserve account for a minimum period of 20 years
- A tabular list of the component inventory, quantity, description, total useful life, remaining useful life, and current replacement cost
- A description of the goals and methods used in determining the fund status and developing the funding plan
- All the sources used to calculate the cost of repairs and replacements for the components
- A description of the level of service in the preparation of the reserve study
- The fiscal year that the reserve study serves
Supplementing these seven items with graphs, diagrams, tables, photos, and spreadsheets to visualize the data is wise. These visualizations allow board members to understand the findings more easily and better plan for the HOA’s future.
How Much Does a Reserve Study Cost?
A full, comprehensive reserve study tends to be the most expensive because it is in-depth, requires a site inspection, and includes a 30-year funding plan.
Meanwhile, a reserve study update with a site visit is the second-most expensive. This study is not as comprehensive as the first because it only updates a previously completed study. This also comes with a new 30-year funding plan. Still, it does involve a site visit, which impacts the HOA reserve study cost.
Finally, the cheapest type of reserve study is simply an update with no site visit.
Given the varying natures of these studies, price points can differ greatly. Companies may also charge different fees depending on their level of service, location, and other factors. In general, though, associations should expect to pay anywhere between $500 and $10,000 for a reserve study.
What is the New Law for Reserve Study in Florida?
Florida’s requirements for HOA reserve studies have grown stricter. After the collapse of Champlain Towers South in 2021, legislators in the Sunshine State enacted more stringent requirements for condo associations.
According to the new law, a structural integrity reserve study for a condo association must be completed by December 31, 2024. A structural integrity reserve study (SIRS) is different from a traditional reserve study in that it focuses more on the physical condition and strength of the building and is more comprehensive in its inspection.
Buildings must complete a milestone inspection by the end of their 30th year after receiving the certificate of occupancy. Meanwhile, buildings within 3 miles of a coastline must complete this milestone inspection by the end of their 25th year. After that, inspections must occur every 10 years for both types of buildings. However, this requirement does not apply to buildings with three stories or less.
In the past, associations could waive reserve funding with a majority vote. However, the new Florida law makes this impossible. Associations can no longer vote to waive funding altogether or only fund a portion of the required amount.
Be Smart with Reserve Studies
An HOA reserve study holds significant value in budget planning and financial stability. However, far too many associations ignore this need. Even if state laws don’t require reserve studies, associations would still be wise to perform one with the help of a professional.
Freedom Community Management provides HOA management services in Florida. Call us at 904-490-8191 or contact us online to learn more!
