Sound financial management is key to successfully managing property, whether it’s an HOA community or tenancy in common. In an HOA, the board of directors will use a reserve study to plan for significant expenses for repairing and maintaining common area components. Similarly, properties with numerous unit owners use reserve studies to build a well-funded HOA reserve account so any default by owners or unexpected costs can be covered. But should you hire a reserve study professional or do your reserves in-house?
When An Internal Reserve Study Makes Sense
Before budget season, an HOA board of directors may look at their options for calculating their reserve fund allocations. The two main paths to consider are doing an internal reserve study or hiring reserve study professionals. A third option would be to update the previous reserve study with any new information and component list changes.
You Have Limited Reserve Items
One of the most common reasons a board of directors will consider doing reserves in-house is when there’s a limited amount of community assets and reserve components. For example, a homeowners association may only have a few low-story buildings or a small number of reserve components. Another scenario would be when an HOA of single-family homes only has a small number of assets for the community, like a playground or basketball court.
You Can Access Reliable Cost Data
Another factor to consider when choosing to do an internal reserve study is your access to accurate, reliable cost data. Cost data is critical when you’re estimating the remaining useful life of your community association assets and items in your component list. There are many ways to get cost data for your common area components and other reserve components:
- Using a recent work bid for your community association.
- Accessing a commercial cost data service like Marshall and Swift.
- Referencing your association’s capital expense history and inflating for the current dollar value.
Gathering and working with cost data can be challenging so only use board members who are competent and comfortable performing this task.
Internal Reserve Studies vs. Professional Reserve Study
While performing reserve studies in-house can be beneficial for smaller community associations, it is a different situation for larger HOA associations. In this scenario, a reserve study will encompass numerous capital assets for the community. With a higher number of component list items and capital assets comes a larger probability for error. Also, the errors that can occur for community associations with numerous items in their component list will be of a greater magnitude than in a smaller HOA.
Hiring a reserve study professional provides a board of directors with the peace of mind that its reserve funds will be properly analyzed and mapped according to their reserve funding goals and objectives. As any wise board member knows, there are numerous downsides to dealing with underfunded HOA reserve funds, including having to rely on special assessments to pay for significant costs and expenses.
Although many board members fall into the trap of forcing special assessments on each HOA member, it is a preventable outcome. With a reserve study, a reserve analyst will look at your reserve funding objectives, including whether you want a baseline funding plan, threshold funding plan, full funding plan, or require a statutory funding plan.
Although statutory funding determines the percent funded by local government regulations, other reserve funding objectives are based on the risk tolerance of the board of directors and the community association’s best interest. Once the reserve analyst understands your funding plan goals and has examined your common area components and common elements, they’ll recommend a funding method. The two main funding methods are cash flow funding and component funding (also known as straight-line funding).
Get A Professional Reserve Study!
At California Builder Services, we perform reserve studies for property owners and HOA association communities who understand the value of long-term financial planning. We also help homeowners associations create sound budgets that enable prudent financial management for their association. For subdivisions and land developers, we provide DRE public report consultation and processing assistance that are timely and accurate for our clients. Contact us today or request a proposal!