The slightly technical definition of a reserve study is: a budgeting tool based on the art and science of anticipating and preparing for major common area repairs and replacement expenses an association will face in the future.
In other words, a reserve study:
- Is a budget planning tool
- Shows you the current status of your reserve fund
- Gives you a stable and fair funding plan for the future
- Helps pay for expected major common area expenses
The goal of a reserve study is to have a funding plan to maintain the community, so the association can:
- Do work when it’s needed
- Have money, through the funding plan, for the work
- Continue to save money for future components and projected expenses when needed
A reserve study involves both a physical and financial analysis
- The physical analysis provides a clear list of every component that is a major common area asset in your association, and its anticipated lifespan before repair or replacement is needed.
- The financial analysis is done for every physical component in the association, giving you the current replacement cost and the projected replacement cost for the future.
A reserve study is an Art and a Science
It may be helpful to think of the reserve study as an art and a science or in terms of right brain and left brain. You've got the right-brained who are the “art” – creative, artistic, and asking questions that are outside the box – while the left-brained are the “science” – methodical, analytical and more of a number cruncher.
The art-minded can see the big picture and often have more insight into future planning; while the science-minded often pay better attention to details and find ways to make a plan for right now. Having a balance of both perspectives when developing a reserve study is important to make it effective for the future of your HOA community.
The best way to develop your reserve study is by using a reserve specialist. If you don’t have a reserve specialist, you can hire one or hire an HOA manager to help you navigate the process. Either way, it’s crucial that the board gets outside counsel from experts who have the knowledge.
A reserve study is not a simple task. It involves insight, experience and a team to create a plan that will protect, maintain, and enhance your association community.