Do we LEGALLY need a reserve study?

I have owned my condo for 8 years and have never had a reserve study. We have a 10 unit building. Our HOA dues are very low for Los Angeles and owner like it that way. HOWEVER, we have very little in reserves (IMO) and the other owners do not want to pay for a reserve study. Are we legally obligated to have one done? What happens if we don't. I would like to but will look like the bad guy if I press for one. Thank you.

You'll find the answer in your state's laws governing HOAs/condos. Some states have exemptions for very small associations, and yours may qualify. (I assume your association is incorporated.)

The good news is that you may not have to pay for pros to do your reserve studies. I assume you have limited items that would be covered (roofs, foundations, plumbing and electrical systems, siding/brick/etc.) What you need to do is estimate the remaining useful life of these systems, figure out when they'll need to be replaced, the cost of those replacements, and how much you need to set aside to make sure the money is there.

As to whether it's smart to do without a reserve study altogether ... If the owners don't mind having to cough up many thousands of dollars on short notice when things need to be replaced, then sure... forget the reserves.

What I've seen in practice is that associations that operate that way are also short-sighted about a number of other things. When they can no longer kick the can down the road, they discover that they can't actually afford their homes. When that happens, assessments won't get paid, and the board has to resort to collections/foreclosure if allowed in your state. These things are unpleasant enough in any community - in a very small one where you're living on top of each other, it's worse. Or you let the place completely fall apart.

Also, Banks care about things like reserves. On the other hand, if your buyers can pay cash for their homes, then this is less of an issue.

If your community really gets itself into trouble, it's small enough that a corporate investor may be interested in buying up your property, assuming it hasn't gotten too run down. (On the other hand, I recently saw some articles/videos suggesting that the heyday of corporate landlords may be coming to an end. The economics no longer make sense in a number of areas around the country. California was one of the states that was mentioned.)

What Cathy said.

You and your neighbors might also want to rethink the "our assessments are low for LA, hooray!" mindset. Everyone likes to pay less for things, but for some reason, forget about basic math and time. There's very little, if anything, that costs less today than it did even a year ago, let alone five or 10. For example, I'm sure you've noticed your homeowners insurance creeping up in the last few years due to wildfires, drought, etc.

You're also well aware of what's happening in your area (and I do hope you and your neighbors are ok), but once the community gets past this, what do you think will happen to your insurance premiums? I'm not just talking about individual insurance, you also have the association's master insurance to worry about. That's been skyrocketing everywhere (just ask anyone in Florida) and there have been lots of conversations on this website on the subject.

It's one thing to be prudent about spending association money - that's why due dilligence requires getting more than one quote for expensive repairs, having a routine maintenance schedule, being consistent and fair about rule enforcement, etc. It's another to be cheap.

At least once every three years, the board shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development, if the current replacement value of the major components is equal to or greater than one-half of the gross budget of the association, excluding the association’s reserve account for that period. The board shall review this study, or cause it to be reviewed, annually and shall consider and implement necessary adjustments to the board’s analysis of the reserve account requirements as a result of that review.

Chances are near 100% that the total replacement value of your HOA's major infrastructure and amenities is equal to or in excess of half the annual budget. In this case California Civil Code 5550 requires a reserve study.

"Half the annual budget" = half the total annual income.

Are you aware of the Davis-Stirling.com site? Its search engine is excellent. The search engine spews out the answer to your question in a couple of seconds.

Been away a few days. Good replies by Dean & Marshall. I think Dean's is a a citation & perhaps he'll cite the source--probably the davis-stirling.com site.

What common areas does your HOA have responsibly for?f is it an entry "monument? Or all roofs. Or ossibley elevators?

Your Board can be liable if it fails to follow the state a statute on this matter.

In addition, lenders do not like HOAs w/out studies or a reserve account.

The question is really, what might happen if you don't? The reserve study we had done is so complex and thorough, it is not something an untrained layperson would be qualified to do unless they had one done and could follow the same analysis going forward. It cost us about 3,000.00 and was worth every penny for a nonbiased report that can then be relied on by all future board members and is trustworthy by any interested buyer. Again, a reserve account is required by CC&Rs and is a fiduciary responsibility to ensure there are sufficient funds for the community's future infrastructure repairs and replacements to maintain its integrity going forward. You know an AC lasts so long and you will have to buy a new one, painting, plumbing etc. even driveways, gates and roofs have a life span, taking into consideration future increases is labor and materials, etc. Generally, the consensus is to have a healthy reserve; you need 70% in reserves to cover what the next 10 years the reserve study covers and then can start a plan on how to ensure your reserves will be funded accordingly.

My condo docs require it and the state passed a law for it. It is a critical barometer of the financial health of the association. When you have turnover with the folks who are owning it allows for folks not pay for their fair share and skip out of town when they move. Not paying reserves is kicking big expenses down the road for the newer owners. It's like musical chairs and when the repairs, replacements are due it's the ones who are under the roof at that time that have to pay. Your current owners are liking the fake low expenses. Only time that is ok is if the owners have been there for a long period of time and planning to stay there for a long period of time. No one has long cycles of ownership these days. The tough part is convincing them. I was able to get it done over here by the new State lae. It was suggested to me to get the reserve company to make a presentation. Fortunately one of them had webinars materials that they can view. Also gave them links. You are in a tough spot when doing the right thing means it hits their wallet.

Jason,

I grew up in LA and had rentals there when it became popular to update and convert older rental multiple units into privately owned units, aka condos. They tore down some and built new condos, too. Depending on when it was built and or converted could mean a big difference in how old your infrastructure is and its condition. Has its foundation been earthquake-proof too? You should ask your HOA board or management co if they have ever done a study and where it is because you are entitled to see it if it exists. If wasn't done recently you will want to get it updated so your community has good information to work given how the cost of goods and services has increased in the last few years so you how prepared you are and what your reserve status is or needs to be so you are not caught with your pants down or unable to sell!

My condo is exactly that. A rental property that was converted to condos in 1980. It has been earthquake proofed. There has never been a study in the 15 years that the longest person has lived here.

Check with your state laws on condos and your CC&Rs for legal requirements, but beyond that, you really want to get one done as a community so you can prepare for future expenses. The cost is minuscule to the value a Reserve Study provides. I'm in AZ, and we paid about 3,000.00 a couple of years ago for 192 units. So I'm guessing your cost will be several hundred for just 10 units. It might reveal some major upcoming issues and mandatory code updates, too.

That's not quite true. The state does not require you to do but a basic visual inspection every three years, and apparently it is not monitored very well since this community hasn't seen one in over 15 years. Although it really recommended to have a professional reserce study done if you are condos and it's been that long since you have had one. This is the California RE information on requirements to provide buyers.
https://dre.ca.gov/files/pdf/re25.pdf

California Civil Code 5550 requires a Reserve Study based on a "diligent visual site inspection" at least every third year, but requires the Board review that Reserve Study annually and "consider and implement necessary adjustments". That's called an annual Reserve Study update.

I supported my comment with links to California Codes that have all the accurate information the OP needs about reserve study. (Would not depend on information from comment on this platform, contact your property management, or an HOA attorney for a recommendation to a reputable Reserve study company. Again, the cost will be much less on 10 units and something that would comply with disclosures to buyers, too.

Here you go. you might have provided some real information instead of criticism offering no context.
Here's a Calif Reserve Study Speicalist that knows all current Calif state requirements https://www.propfusion.com/law-guide/california-reserve-study-requirements

I went to the sites that Darlene recs and see nothing that contradicts CA Civ. 5550 cited by many above. One shouts it out: "Are reserve studies required in California?
Yes, reserve studies are mandatory for HOAs and Condos under the Davis-Stirling Act. Boards must conduct a reserve study every 3 years to comply with state law..."

The "real information" is that all* Cali HOAs* are subject to the Davis Stirling Act. And Civ. 5550 is part of "the Act."

* with a fw exceptions.

I give up. Would anyone else who posted care to chime in

Civil Code 5550 requires much more than this. From Civ Code 5550 (b):

(b) The study required by this section shall at a minimum include:

(1) Identification of the major components that the association is obligated to repair, replace, restore, or maintain that, as of the date of the study, have a remaining useful life of less than 30 years.

(2) Identification of the probable remaining useful life of the components identified in paragraph (1) as of the date of the study.

(3) An estimate of the cost of repair, replacement, restoration, or maintenance of the components identified in paragraph (1).

(4) An estimate of the total annual contribution necessary to defray the cost to repair, replace, restore, or maintain the components identified in paragraph (1) during and at the end of their useful life, after subtracting total reserve funds as of the date of the study.

(5) A reserve funding plan that indicates how the association plans to fund the contribution identified in paragraph (4) to meet the association’s obligation for the repair and replacement of all major components with an expected remaining life of 30 years or less, not including those components that the board has determined will not be replaced or repaired.

(Underlined emphasis is mine.)

The word "section" refers to California Civil Code Section 5550.

Here's AZ state law. None! But we do one done periodically and yes it's mentioned in our CC&Rs, but it has not always been faithfully adhered to either!

Arizona HOA and Condo Reserve Study Requirements: Overview. While Arizona does not legally require reserve studies, they are a valuable tool for effective financial planning and community management. Here's why reserve studies matter:

A "wallah" to you, Elle! My, um, uncertain health issues have made me lazier than perviously.

https://www.longbeachpropertymgmt.com/blog/reserve-study

https://www.caionline.org/advocacy/advocacy-priorities-overview/reserve-requirements-and-funding/#ReserveStudies

I think we agree that a reserve study is in order The real question is who does it. The code is a bit vague due to visual inspection of someone who is competent. That tends to be a reserve specialist. The first blog points to the wording and for reason of liability that it should be a specialist. The second link gives details on reserve and funding of reserves which are two different categories by state. II think the ambiguity of the code most likely is supplemented somewhere else.

NJ enacted mandatory reserve studies to be performed by a person 1) holds their Reserve Specialist designation, or 2) is a licensed Professional Engineer or Architect in the state of New Jersey.

Does California have the required designation of the person conducting the reserve study in another part of the code?

Yes, yes, and yes.

GregoryT1, if you agree the following statement (and similar ones) by DarleneD3 is true, okie dokie. Then I disagree with both DarleneD3 and you.

Then do you disagree with Terry also?

Thank you. it was meant to be a technical answer, not necessarily a practical one. I do support hiring a company that can conduct a thorough Reserve Study. I just dispute the CA code or even all CC&R's requires it to be hired out to be done by XYZ. As I said, no one from the government monitors this unless it becomes a legal action, or the OP would not have said they haven't seen a study done for 15 years the longest resident has attested to, which should be provided for members to review either by asking property management for a copy or on their website like mine is. Since the assessment is subjective based on ever-changing conditions, it's a guide that also has a life span and will need updating. I would think it would deter someone from buying if they find the communities' reserves are not in a heathy condition or have not done a formal evaluation aka Reserve Study, it could mean special assessments on future owners is likely. I did not get such information from my RE agent or even understand this until years later when attending an HOA meeting, given it was my first HOA experience. seems the same is true for this OP.

It’s good that you have very little in reserves. Twice in the history of my HOA, the reserve money was either stolen or mis spent (hundreds of thousands of dollars). That happened because once the board had our money, they didn’t need to explain to us what they did with it. Compare that to running your HOA by special assessment where the board must ask you for your money and explain to you why they need it and when it will be spent. When your board proposes a special assessment, people start paying attention. That’s a good thing as it combats homeowner apathy. The best way to save for the future is for each homeowner to save for it within their own savings account. Inspired and repeated communication by the board and management company helps the homeowners to prepare for future expenses on their own.