Finance management is a crucial aspect of any organization, including HOAs. By analyzing the funds you currently have, you can better plan for projects in your community. And that’s why HOA reserve studies are important.
What Is a Reserve Study?
Don’t let the name and purpose of a reserve study scare you. The actual task of a reserve study is quite simple and straightforward. In short, this study helps to determine the amount of funds (or reserves) an HOA should have set aside to pay for future major or routine repairs.
The main reason a reserve study is crucial is that you may be asked by your lender to prove that your HOA has proper reserve funds or insurance. By performing a complete reserve study, you’ll have proof and will build a stronger, more financially sustainable HOA.
What is a reserve study? It’s the process of examining and evaluating your HOA’s present financial status, analyzing its future needs, and then projecting the amount of funds needed for the next few years.
How to Perform a Reserve Study
How do you perform a reserve study? You’ll need to gather past financial data from your HOA’s bank and examine it to see if it’s sufficient to cover the costs of any upcoming projects. You’ll need to evaluate these funds and analyze the data the same way you would the annual budget.
The process of interpreting reserve study data and projecting future costs is quite simple. You need to know the following information:
- The amount of reserves the HOA currently has
- The remaining useful life of any assets, including buildings, equipment, roadways, and other items
- The replacement costs of any assets
- The expected completion dates of future projects
- The costs of any future projects
- The number of members who will be affected by the future project
The information you gathered, then, should provide you with a clear picture of the funds your HOA has on hand and the time frames in which the reserves will be used up.
This information is important for two reasons. First, it allows you to make sure your HOA has enough funds to pay for upcoming projects. Second, it provides you with a step-by-step plan for what projects to complete and when to complete them.
How Often Should You Conduct a Reserve Study
Performing a reserve study is a great idea, and you should do it as often as you feel necessary. The fact is, the more often you conduct a reserve study, the more prepared your HOA will be for all future financial needs.
If you conduct a reserve study once every few years, though, you’ll find that, as your HOA continues to grow, the study will become useless (and could potentially lead to financial disaster). That’s why it’s beneficial for many HOAs to perform a reserve study every year or every few months.
The bottom line is that your HOA doesn’t need a reserve study every year. It needs one when its financial situation calls for it. That’s the time to conduct a reserve study, and it’s the only time the study will be effective.
Funding is crucial for any HOA, but especially for newly established associations. If you want to start your HOA off on the right foot, you should conduct a reserve study to make sure you have enough funds to pay for all future projects.
Have a better understanding of your HOA’s finances with the help of California Builder Services. We provide HOA reserve study services that can help you plan for success. With decades of DRE experience and practical knowledge, our professional team offers timely, accurate reports for subdivisions and homeowners associations. Request a proposal now!