As a homeowner or renter in a homeowners association, you know the importance of setting aside a little bit of money each month in case of an emergency. After all, you never know when you might have to replace an appliance or take your car to the mechanic. In order to effectively do this you’ve probably analyzed your budget and determined an amount that you can comfortably set aside each month so it’s there when you really need it.
As an HOA board member, this is exactly what you should also be doing for your homeowners association. Part of the required HOA fees you and your fellow members pay each month should be set aside for future repairs or upkeep to areas of the Association. The the amount to set aside is determined by hiring a professional provider to conduct a reserve study. As an HOA board member, it’s important for you to understand what a reserve study is and what it means for your homeowners association.
What is a Reserve Study?
A reserve study is a complex document that projects when numerous major components in a homeowners association will need to be replaced, what it will cost to replace them, and how much the association will need to set aside each year to pay for the upkeep when necessary.
Areas of the association that might need maintenance or replacing could be the roof, parking lot, swimming pool or tennis court. Preparing the reserve study requires a unique combination of specialized engineering knowledge, a keen understanding of financial projecting, and savvy investing skills.
Not only is doing a reserve study wise financial planning, it's also the law in California:
"All associations, regardless of size, are required to prepare a reserve study (Civ. Code §5550), unless the total replacement costs are less than 50% of the gross budget of the association, excluding the association’s reserve account for that period. (Civ. Code §5550(a).)"
Who Does the Reserve Study?
Typically, a reserve study specialist will conduct the study, but actually anyone can do it. However, it's important to know what you're doing and what to look for.
Professional reserve study providers are extensively trained before they are considered qualified to perform a competent reserve study on a particular homeowners association. These professionals have met stringent requirements and are held to high standards. They have a thorough knowledge of common interest developments, HOAs, and community associations, and can provide the HOA board with sound guidance.
When preparing a request for proposal for a reserve study, a homeowners association can and should specify that the study must conform to the National Reserve Study Standards of the Community Associations Institute, as well as state law.
Who decides how much money to actually set aside?
The HOA board members who govern the homeowners association will ultimately make the decision of how much money to set aside each year for the reserve fund and they should take their fiscal responsibility very seriously. By hiring a professional to conduct the reserve study or an HOA manager to help guide them through the process, they're able to confidently plan for the future and be good stewards of member's money.