Frequently Asked Questions About Reserve Studies
What is a reserve study?
A reserve study is a written report that evaluates the common areas of a homeowner association. It provides guidance on how much your association should be setting aside each month for reserves so it can meet its future obligations without special assessments. Reserves are needed to pay for the replacement of common area components such as roofs and parking lots and to pay for major maintenance items such as exterior painting. The California Civil Code sets forth the minimum requirements for reserve studies. Obtaining a reserve study is part of the budgeting process.
Can our HOA board waive the legal requirement for a reserve study?
Absolutely not. Reserve studies are required by law. In addition, they are excellent planning tools. Also, without a current reserve study, your homeowner association’s balance sheet will not be accurate, and therefore, it will be misleading to those who rely upon the accuracy of your association’s financial statements.
What is likely to occur if our HOA fails to obtain reserve studies as required by law?
Failure to obtain a serve study can result in any one or more of the following types of harm:
- It may result in a large special assessment being imposed which some members of the association may find difficult or impossible to pay.
- A member of the association may find it difficult to sell or refinance his or her home which may cost money or even result in a foreclosure. Buyers and lenders are becoming more knowledgeable and are often refusing to become involved with associations that do not comply with the law.
- Owners may suffer the consequences of being a member of an association involved as a defendant in litigation brought by another member.
Do mortgage lenders routinely request a copy of an association’s most current reserve study before they will offer to refinance a real estate loan or make a loan to a new buyer?
Today, most, but not all, lenders request a copy of the most current reserve study or ask questions that must be responded to in writing concerning the association’s financial position. Some lenders will refuse to make a loan to someone who owns or intends to purchase a home in an HOA where the board does not comply with the law. Others will charge a higher interest rate to compensate for the perceived additional risk to the lender.
Who should make the site visit or inspection from the reserve study provider?
The person making the site visit should have at least 20 years of experience as a contractor and cost estimator if you want a reserve study that your board of directors, members, lenders, and new buyers can rely upon. There is no substitute for this type of direct experience. Many reserve study providers use accountants and engineers with no direct, in-depth experience in evaluating the condition of a building’s components. This is not something that you pull out of a manual. Preparing a meaningful reserve study is not a number crunching job to be performed by an accountant.
What is Percent Funded?
Percent Funded is a calculation required by law in California. It is a comparison of the ideal reserve balance and the total accumulated reserve fund expressed as a percentage. It is considered a measure of the overall financial strength of the association.
Is there a reason to avoid funding major repairs and replacements with special assessments?
Yes. Special assessments always unfairly penalize some owners while benefiting others. Some owners end up paying costs that should have been paid by other owners. In addition to being unfair on its face, special assessments often lead to criticism of the board and sometimes litigation.
How much does a reserve study cost?
There is no standard price for reserve studies. The cost is based on many factors which include:
- Whether the reserve study requested is a Level I, Level II, or Level III reserve study;
- The size of the property;
- The number of components to be evaluated;
- The knowledge and experience of the person assigned to make the site visit. Construction experts with over twenty years of experience maintaining buildings, estimating costs, and most importantly, estimating the remaining useful life of building components, are more costly to hire than people without these necessary skills.
- The quality and quantity of documents provided, including prior reserve studies, contracts for jobs recently completed, proposals for jobs expected to be completed in the near future, etc. We do not charge extra because the board needs fast service. We value our clients and never take advantage of them.
Notwithstanding the above, Level I reserve studies average $950 to $1750, Level II reserve studies average $800 to $1,200, and Level III reserve studies average $450 to $650. Please call for a quote or request a quote online.
Does the Federal Housing Authority (FHA) require minimum reserve contributions and reserve studies?
Yes. The FHA requires reserve studies and insist that reserve contributions be at least 10% of the total budget for homeowner associations.
What is a reasonable “percentage funded” amount?
You will get various opinions but most professionals who provide reserve studies use the following guides:
90% to 100% Excellent
70% to 89% Good
30% to 69% Fair
Under 30% Poor
Is a reserve fund a savings account?
It is far more than a savings account. The balance in your association’s reserve account should be equal to the estimated deterioration of the common area components. For example: If your HOA has $1,000,000 in its reserve account, the estimated deterioration should be approximately $1,000,000.
Can accumulated reserves in the reserve account be used to pay for any reserve component needs to be repaired or replaced?
Yes. Your reserve account is a pool of money that is available at any time for any common area component.
How do you determine the estimated remaining useful life of the many components included in most reserve studies?
The estimated remaining useful life of reserve components is determined by the construction expert making the site visit by carefully observing the condition of each component. This is a skill developed over many years. These numbers are not found in a manual.
While the estimated useful life of a new component can be found in various manuals, if the component is not new, an estimate must be calculated by the construction expert based on his or her observation and skills.
For example: A new roof might have a useful life of 20 years. When the roof is 5 years old, its remaining useful life may be more or less than 15 years. Twenty years is an estimate only. Depending on weather conditions and maintenance preformed or not performed the remaining useful life will vary. Your reserve study should be based on what a construction expert estimates the remaining useful life of every component to be. Your reserve study should not be based on a simplistic math formula which is exactly what some reserve study providers give their clients.
Our board refuses to obtain a reserve study for our HOA. Can board members be held legally liable for negligence if they won’t obtain a reserve study?
Yes. Negligence is a civil wrong (tort) that has the following elements: (1) the defendant must owe a legal duty to conform to a certain standard of care for the protection of the plaintiff, (2) the defendant must have breached his or her duty by failing to conform his or her conduct to the required conduct, (3) the breach must be a legal cause of the plaintiff’s harm or injury, and (4) the plaintiff must have suffered harm or an injury.
Given that interest rates offered by financial institutions are low, can our HOA invest our reserve funds in a mutual fund?
Absolutely not. All funds must placed in an account insured by the United States Government.
What is the best time for an association to request a reserve study?
Since you will need it for your annual disclosure package, including the budget and any fiscal year-end accountant’s review, you should make the request about 60 days before you will need the report for those purposes. For example, if your homeowner association has a December 31st year-end, you must send out your disclosure package. including the budget, 30 to 90 days prior to January 1st. Depending on your target mailing date, you should allow 60 days to safely receive your reserve study.