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Reserve Study

Started by SueH6 • 20 replies • 847 views

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SueH6 (Kentucky)
Posts: 1
Posted:
I am the treasurer on our HOA Board. At this time we are facing replacing roofs and/or gutters. We are only about 25% funded. Our community is only 19 years old. We have been told that a bank will not even talk to us unless we have a Reserve Study done. We have found that the study is going to be $1600. We have 8 buildings with 4 units in each one and 1 building with only 2 units. Please comment on any contradictory information that you think I may have received or help me by saying that sounds about right. I am completely new to this type of situation, but have owned a single piece of commercial property that contained my own business. All comments welcome!
GeorgeS21 (Florida)
Posts: 3,808
Posted:
Others with more experience will comment, but apparently your HOA has not been collecting enough money - no magic, there.

Recovery is what you are now talking about - I.e. getting more money.

1 - immediately make sure everyone is aware of the problem and that it will require higher monthly assessments and a special assessment
2 - immediately start collecting more money
3 - immediately get an accredited professional reserve study started ... you need this regardless of what happens

Be open and clear with everyone in the community ... spend extra time explaining how a reserve study works and why it is important. They will all be reeling from the special assessment requirement, so make sure you approach this clearly.
KerryL1 (California)
Posts: 14,550
Posted:
George offers good advice. Do get the s study done. 25% funded is NOT good. Even thorn KY, check the CA website davis-stirling.com and scroll the menu to reserves, where you can learn a lot.
BillH10 (Texas)
Posts: 1,217
Posted:
Regarding the Reserve Study expense, it sounds about right. We manage condominium properties in north Texas and typically pay $500-$600 for studies involving 2, 2 story buildings with multiple living units, flat surface landscaped common areas, and no amenities such as pools or clubhouses.

Please be aware the Study should be refreshed every 4-5 years.
MarkM19 (Texas)
Posts: 1,459
Posted:
Sue,
My first order of business is to have an emergency increase. This does not require anything more than the board saying we are severely underfunded. I think you can raise the dues 10% without any problem. You can do that 2 or 3 years in a row if necessary.This can happen very quickly and you will see the funds almost immediately.

Then you need to have the reserve study done. From what you say it is going to cost it will be a full and complete study. Everyone I have ever seen clearly lays out every reserve item and gives replacement cost and estimated life remaining. Anyone that can read should be able to understand the reason for a special assessment if it is still required. This requires more work and a vote of the community.
AugustinD
Posts: 5,144
Posted:
-- Here is the definition of percent funded, including an example involving roofing: https://www.reservestudy.com/what-exactly-is-percent-funded/

-- 25% funded is deplorable. If this is not fixed, your condominium will likely face a several thousand dollar special assessment for each unit within the next decade.

-- Roofs that are 19 years old may be at high risk of leaking.

-- In my experience with a few reserve studies, $1600 for a Reserve Study of a 34-unit condominium is reasonable. Make sure the company doing the Reserve Study has appropriate credentials. The Reserve Study will suggest how much the regular assessment needs to be raised to get up to

-- Avoid taking a loan from a bank, since the cost of interest is high. Instead, as needed, raise the regular assessment now (per guidance from the Reserve Study) or plan on a special assessment.

-- It is not unusual for condominiums to be foolish and end up sticking owners with a surprise, one-time special assessment of $7000 or more. This turns off buyers. Avoid this. The corporation should save regularly. Have a Reserve Study done at least every five years.

CathyA3 (Ohio)
Posts: 6,299
Posted:
I agree with George's comments.

You can shop around to see if you can get a somewhat lower price for the reserve study, but your quote sounds reasonable - it's about what we paid in 2018 for our study. We have a new reserve study done every 3-5 years, and we budget accordingly.

Funding your reserves is important. Lenders often won't approve mortgages if a community is not funding its reserves properly. This limits the pool of prospective buyers and can harm property values. And, as you're finding out, communities without adequate reserves have to rely on special assessments or loans (assuming a bank will lend the money). Ohio actually requires condo communities to fund their reserves according to their most recent reserve study. You may want to check if Kentucky does the same.
GenoS (Florida)
Posts: 4,276
Posted:
Quote:
Posted By SueH6 on 03/23/2019 9:02 AM
I am the treasurer on our HOA Board. At this time we are facing replacing roofs and/or gutters. We are only about 25% funded. Our community is only 19 years old. We have been told that a bank will not even talk to us unless we have a Reserve Study done. We have found that the study is going to be $1600. We have 8 buildings with 4 units in each one and 1 building with only 2 units. Please comment on any contradictory information that you think I may have received or help me by saying that sounds about right. I am completely new to this type of situation, but have owned a single piece of commercial property that contained my own business. All comments welcome!

If you're not working off of a reserve study, how do you know you're 25% funded? Who's doing those calculations and how are they made?
KerryL1 (California)
Posts: 14,550
Posted:
Geno asks a good question, Sue: Without a reserves study, how do you even know if you're taking into account all components (items your HOA's responsible for that fit the 4-part test to be in a reserves study)? Even if taking into account all components that should be in your study, how do you know how to assign a Remaining Useful Life (RUL), which can involve accessing manufacturers' estimates of useful life?

Once your reserves analyst does the work to study you HOA, s/he'll recommend a way to get to 100% funded in a short time. Your board doesn't have to accept that and might want to shoot for a gradual path to 70-100% funded. Ask you analyst to prepare some different scenarios for your HOA so that increased dues aren't too hard on your owners.

GenoS (Florida)
Posts: 4,276
Posted:
Board members here have bandied about the term Percent Fully Funded since I've been here (~ 5 years). It didn't take long to figure out that they had no idea what they were talking about. We've never had a professional reserve study done (not required in Florida). For the last 2 years I've done up a spreadsheet that reflects what I think is a reasonable FF % for the items we DO reserve for, but I know there are reserve components we should be reserving for but are not, and that affects the actual number. For the last 2 years I've made it known in big, bold letters that my spreadsheet is speculative, at best, and this year I'm pressing the idea that we need to have a study done by professionals.

From what 3 different bookkeepers and the PM have told us, we have a LOT of reserve funds in the bank compared to many other HOAs in the county and that gives everyone a warm fuzzy feeling. But a "lot" isn't the same as "sufficient" and a lot of homeowners and board members don't understand reserves at all. They can't figure out how we can have more than $500,000 in reserves and be underfunded. A professional Reserve Study would answer that question and let me say, "Don't take my word for it."
MarkM19 (Texas)
Posts: 1,459
Posted:
Geno,
That is the great thing about the study. It is reliable and accounts for items that may not have made it on your spreadsheet. I trust but verify things that I am told by PMs. For them to say you are better than most means nothing because the rest may be one issue from being broke. I hear from some homeowners in my current association because we have 500K in our accounts that we are rich. They do not realize that with 1200+ homes in our community that is just about $400 per household for repairs. People are very short sited. If anyone thinks that is sufficient they should go back to fifth grade math class.

You are on the board because they have entrusted you to manage their HOA affairs. Part of that is understanding how valuable reserves are in life and on HOAs.
TimB4 (Tennessee)
Posts: 21,059
Posted:
Sue,

If you haven't had a reserve study done, you really don't know what level of funding your reserves are.

Sounds like you are in a condominium association from your description. Although, one can do a study on their own, I think it's best for a condominium association do have a reserve specialist do one.

For more info on reserve studies, see the following thread:

Subject: Reserve Studies/Funds 101

Some of the links in earlier posts were broken and corrected in later posts.
Some links are simply broken.
However, the thread has excellent info.
KerryL1 (California)
Posts: 14,550
Posted:
PS & with others, Sue; $1,600 for a brand new study, where the analyst comes on your premises and examines every common area component seems reasonable. Subsequent years should be cheaper.
MarkM19 (Texas)
Posts: 1,459
Posted:
Sue,
As Kerry stated the price is what we paid in Ca. for Community that had 3 building, a Pool and Tennis courts and 3 large parks. We had the Major study done every 3 years and a minor report which cost $800 during the next 2 years. The minor studies may not be needed in your case. I really think you need to get the Major one done so things will be clear.
GenoS (Florida)
Posts: 4,276
Posted:
Quote:
Posted By TimB4 on 03/23/2019 3:57 PM
For more info on reserve studies, see the following thread:

Subject: Reserve Studies/Funds 101

That thread is still extremely valuable and provides some really good information.
SamE2 (New Jersey)
Posts: 310
Posted:
We were able to get a loan without having a reserve study but that does not mean you should not have a reserve study done.
RichardP13 (California)
Posts: 3,868
Posted:
If a HOA hasn't done a Reserve Study, no bank in their right mind would consider a loan for your project. They would be looking for a long term plan. Get a reserve study done now. The costs you mention are reasonable. Then make sure have the Board approve a reasonable funding plan. You potentially could be faced with a very large expense all at one time.

Once the reserve study is done and a funding plan in place, then you could do a loan for say 15 years, easier on the owners and the Board looks like heroes.
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Sue

Until you have a Reserve Study done you are simply guessing at how much the dues should be raised. Get a Reserve Study done ASAP.
KellyM3 (North Carolina)
Posts: 2,239
Posted:
Sue,

Don't borrow money for this project as your HOA will remain "broke" and have the added monthly payment of the loan further crimping cash flow.

Just because one of the 19-year-old roofs need replacing does not mean replacing all roofs on all buildings is in order. People will say it isn't "fair," but only do what is necessary at the time. Look at the function of the roof, not the age, since your Reserves are under-funded.
KerryL1 (California)
Posts: 14,550
Posted:
Good advice from Kelly. Some boards argue that their HOA gets a better deal if they do all at once--you know, "economies of scale." But their argument can miss that some roofs can last a lot longer than others depending on exposure to sun & weather. It also misses the disruption, noise, dirt for weeks or months when a major project is being done.

We're having a similar debate in my HOA about economies of scale vs a huge expenditure all at once and lifestyle chaos for a year.
GenoS (Florida)
Posts: 4,276
Posted:
After 2004 when hurricanes Frances and Jean blasted Florida my HOA had a substantial insurance claim that was paid. Our insurance carrier cancelled the property insurance in 2006. At that time, insurers in Florida had a policy that they would only insure "equal risk" on buildings. We have 100 homes that the HOA is responsible to insure with a master policy. As a result, our insurance agent at the time recmmended that the HOA re-roof ALL of the roofs including the ones that didn't need it.

Since then the insurance industry in Florida has changed the way it does business and our current agent told us last year that as our reesrve schedule ticks down towards Remaining Useful Life = zero, the insurance carriers today are not going to require all roofs to be re-done at once (or within a couple of years of each other).

I guess what I'm saying is "check with your insurance agent". At one time, if you were in Florida, you would have been required to replace all of the roofs, not just the one that was getting really bad.

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