Reserve studies are a great tool to project reserve item quantity sizes and future costs. They contain detailed information about the association’s long-lasting capital reserve items—things like roofing, painting, paving, clubhouses, recreation areas and various other items. Reserve studies project how long an item will last (useful life), how long that item has before it should be replaced (remaining useful life), the current cost of that item, and the future cost of that item. This information is integral in preparing the annual budget for the association.
Reserve studies benefit multiple users. Here is a list of typical users that benefit from having a reserve study performed:
Board of Directors
A reserve study may be most beneficial to the current board of directors. This is the case because they are directly involved in establishing next year’s budget, and reserve items are a component of that budget. If the board of directors were just to take a wild guess on reserves, it could lead to underfunding and a big special assessment in the short term or long term.
Other homeowners in the association benefit from the reserve study because it puts them on a more sound long term track. With a reserve study, special assessments are likely to be eliminated or at least minimized. A reserve study is the most fair and equitable way to fund long-lasting items.
The Association as a Whole
In some communities, they have a reserve schedule that they set up themselves. The items on the schedule may even be reasonably accurate in terms of costs and useful life. However, one common mistake we see is that some associations do not get all of the proper items onto their reserve schedule. When you talk with a reserve analyst, they may have some ideas for items that you should be funding but may not be currently funding.
Property managers show reasonable due diligence when they get a reserve study performed. The reserve study takes much of the guesswork out of the equation. The reserve study will typically show detailed component sizes, so when a contractor is estimating a project size (think square feet of roofing), they already have one estimate of what the size of the job is and what the replacement may cost.
Future Property Managers and Future Board Members
This is one area that is often overlooked involving reserve studies. Many communities have substantial turnover, from property managers to board members. For example, even if a board member goes to great detail to estimate reserves and the remaining lives of items and then sells his property and moves, no one will ever know where the numbers came from. The next board will also have no basis to know if the in-house numbers are reasonable or not. With a reserve study, the association will have a centralized report to help them assess their reserves for several years and know that these numbers were forecasted by a professional.