Reserve Data Analysis, Inc. Welcome to the RDA Midwest Regional Headquarters, Minneapolis
Reserve Study Experts: Tens of thousands of reserve studies since 1983.
What are Replacement Reserves? Replacement reserves are the money a Condo association or HOA association sets aside to offset the ongoing wear and tear of community assets that inevitably need to be replaced. By saving for these large expenses gradually, from year to year on a cumulative basis, the costs are more equitably distributed among all members who receive benefit from the community's assets.
What is a Reserve Study? A Reserve Study is an in-depth analysis of both the physical components and the financial status of the association's long term funding & planning. Among other things, a Reserve Study provides a savings plan which allows you to make small monthly contributions to your reserve account in order to have sufficient funding available when each asset needs to be repaired or replaced. Special assessments or loans are no longer required each time an asset needs replacement.
Why should I pay for this, I'll be dead by the time the money is needed! By reserving for these expenses over time, nobody has to pay for the whole thing in a lump sum. Each member pays only for what they use. It's sort of a Fair-Share plan. You only pay for the depreciation that actually accrues during your residency. Meanwhile, the property is well maintained, everyone's investment is protected, and nobody gets stuck with a huge special assessment!
If assessments are too high we'll never be able to sell! Real life experiences of thousands of communities prove otherwise. Reserve funding actually enhances resale values. Buyers are increasingly sophisticated and know the consequences of under-funded reserves...lost market value, special assessments, etc.. They recognize your home is a better investment if your association has substantial reserves based on a detailed and comprehensive plan to maintain the property and avoid huge special assessments.
As for lenders, they are professional risk evaluators. If you under-fund your reserves, it usually affects whether or not, and how much they will lend-- and what rate they will offer on mortgages in your community.
Why should we save now for expenses that won't be incurred for many years? Reserves are your community's way of paying for what you are using now, a fair-share plan where everyone pays for what they use. A reserve analysis study is a long-term planning and budgeting guide which lets you keep pace with the deterioration by making small monthly contributions to your reserve account in order to have proper funding available when each asset needs to be repaired or replaced.
Can't they pay those future capital expenses with special assessments? Most community association governing documents require the approval of the owners to levy a special assessment, if they allow them at all. Therefore, there is no assurance for any individual member that the funds will be available when work is required on their home. Special assessments are unpopular and difficult to get approved. They are unfairly apportioned, especially for those living on fixed incomes. It's always better to pay a little extra each month than to get hit with a devastating expense all at once.
How much should we reserve? There is no rule of thumb and there are no shortcuts. The only way to determine how much you should be saving for future expenses is to conduct an analysis! What are the association's responsibilities? How much is already saved? How much will you need and when will you need it? There are many variables. Do not guess, do the math!
Additional talking points:
FHA Certification will be lost if our reserves are inadequate! Your reserves must pass muster or FHA will simply refuse to certify or re-certify the development. A reserve study will evaluate your financial condition and calculate an adequate funding plan. If you lose FHA certification you lose a lot of qualified buyers, which drives down home values in your association. Some members might be unable to find a qualified buyer for their home, or find themselves upside down in their mortgage. In short, it could actually cost you more money to under-fund your reserves than to adequately fund them! Your association must meet the standards to obtain either FHA Certification or FHA Recertification.
Carefree living is not cost-free. We choose to live in a community association, at least in part, because the association is responsible for much of the maintenance and repair work, including long term asset replacements. There is no free lunch. The association must pay someone to do this work. Replacement reserves are the only way the association, and it's members, can be certain of its ability to maintain, repair and replace community assets when needed.
Proper reserve funding makes ownership in your community a sound financial investment, whereas inadequate reserve funding makes it a 'less desirable' investment. A detailed and comprehensive reserve funding plan demonstrates precisely how your association will pay for long term maintenance of the properties, protect property values and avoid large special assessments. In essence, your reserve plan is your business plan. Wise home-buyers will gladly invest more money to live in a well managed community than one which is financially unequipped to protect their housing investment.
Certified Public Accountants are required to address the issue of proper reserve funding when conducting the community's audit, review or compilation. If the CPA can't determine how you've set up your reserves, the report will be "qualified". That sends up "red flags" to lenders and buyers alike! Your governing documents or state statutes may require your association obtain a reserve study; budget adequate reserves, or contribute a specified percentage of your annual total budget to reserves; or maintain a certain level of reserve funding. If you are not sure of your obligations, it is advisable to obtain a written legal opinion from a qualified attorney who specializes in community association law.