Reserve studies are becoming more and more common as a part of the budget planning process. Reserve accounts are generally large and reserve studies serve as a key financial tool for the association. They help for the upcoming budget as well as serving as a road map for future years. Your association may be wondering when is the proper time to have a reserve study performed. The following 4 examples are situations when it makes sense to have a new or updated reserve study completed.
1. You have not had your reserve study updated for awhile.
A typical reserve study is effective for about 3 years and certainly not more than 5 years. This is the case because there are so many moving factors in a reserve study. After this 3 year window, economic changes may have taken place. There also could have been a change in interest rates or inflation, or construction prices may have changed drastically over that time. Also, there may have been changes to the property or assets that the association owns, or there may now be deferred maintenance that has come to light which may require reserve funding.
2. If you were self-managed and now you have become professionally managed.
Once a property manager becomes involved, they are trying to discover as many facts as possible about the community. The previous funding of the association may or may not be adequate, but it is a good idea to find out from an impartial person where the reserve accounts stand. Additionally, the reserve analyst will address the remaining life and the useful life of all items. By doing this assessment, the manager and the association will have a better handle on what needs to be replaced first.
3. If you are self-managed and you are not sure if your reserves have been set up properly.
Often times individual associations do not want the task of performing their own internal reserve study. There are a few reasons for this. One is they may not have access to the proper construction cost data or they may not know how to properly compile the financial information. Since reserve balances are typically a big part of an association’s budget (they typically make up 15%-40% of the annual budget), setting up and assessing reserves properly is an integral part of the planning and budgeting process. A reserve analyst will confidently be able to tell your association what financial shape it is in and almost importantly be able to forecast the upcoming years to give you an idea of what to expect in the future.
4. If you are a new association president or board member and you are skeptical about the previous board’s assessment of reserves.
Internal conflict is unfortunately common among many boards. The previous people in charge may have had an agenda that did not look out for the best interest of the community. For example, a board member may have known that he was selling his property soon and tries to keep reserves and assessments as low as possible while he resided there. Underfunding reserves may have been good for him personally, but the association lost a year of funding at the proper level. Additionally, a reserve study should be filed into the important documents section of files and be kept for several years as a reference.
These situations are just a few of the times it makes sense to hire a professional to perform a reserve study. By having a reserve study done, you are showing a high financial aptitude for your association to get on the proper track of funding for reserves and are much more likely to avoid a special assessment in the future.