How frequently should HOAs conduct reserve studies?

by Katie Leslove Blogger

Many types of residential real estate fall under the watchful eye of the HOA, or Home Owner's Association. The HOA, tasked with maintaining the properties in question, do so to keep them generating returns. Some of the property types that fall under this umbrella include:

Planned Unit Developments (PUDs) such as townhouses or single-family homes
Condominiums
Co-ops

While managing a variety of activities for these properties, the HOA also has to conduct a reserve study. Though this isn't a process that occurs frequently, a lot of planning is necessary to ensure all relevant areas get addressed.

What Are Reserve Studies?

Properties under the HOA tend to be communal spaces. Therefore, there needs to be a way to manage any new developments that need to come up in such areas. These could be additions like a swimming pool, newly paved driveways for everyone, among others. Whatever the case, any enhancements require money. The project funds need to be collected and allocated to the necessary contractors to get the job done. That's where reserve studies come in. They help the HOA board get accurate figures in terms of how much money they have, what needs to get done, and how much more money they need for their various projects.

How Are Reserve Studies Conducted?

To give the board an accurate picture of everything under the HOA, a lot of in-depth analysis is necessary. Inspections, budget estimates, and forecasts are among the few activities conducted to determine the property's value. Reserve studies occur in two stages.

1. Physical analysis

The physical aspect of reserve studies involves physically checking on the various property assets. The management of communal areas falls under the HOA's duties. Therefore, managing the property also consists of taking care of matters such as maintenance and repairs of these spaces. Possible new developments also fall under this category.

2. Financial analysis

With this category, the HOA looks at their finances. That will include taking into account elements such as:

what is in the reserve fund at any given time
how much revenue comes in
the necessary expenses

The finances decide what the HOA can do to maintain or improve the property.

After the financial and physical analysis has occurred, the HOA board members can create a report. Within it, you'll have details on all the past projects undertaken by reserve funds. You'll also have details on the current state of the reserve fund. Ways on how to fund the reserve will also get outlined in the report. Within the reserve study's breakdown will also be information on its expected and remaining lifespan. That's in addition to the replacement costs for major areas that the HOA funded through the reserve.

Depending on the state the HOA has been set up, different laws govern the frequency that reserve studies get conducted. But in general, most agree with this analysis taking place every three years. To help you get the details right, you should get the assistance of financial professionals.