What is a Reserve Study?
What is a Reserve Study?
A Reserve Study, or a Reserve Fund Study, is a long term capital budgeting tool used by homeowner associations to budget for capital reserve expenses.
The main purpose of a Reserve Study is to access the association’s financial standing and encourage it to budget wisely. When a Reserve Study’s recommendations are followed, associations have cash on hand for expected capital repair and replacement projects, and avoid unnecessary costly Special Assessments.
A Reserve Study details a property’s common area assets, determines the current strength of the association’s Reserve Fund account, and recommends a Reserve Contribution level.
Prospective home buyers should know what a Reserve Study is and how to interpret the results of a Reserve Study – this can be very helpful in choosing the right association to buy into. Below, find a concise breakdown of the main results of a Reserve Study.
Reserve Study Results
The Component List
The Component List section of a Reserve Study inventories an association’s commonly shared assets which the association is responsible for reserving for, as determined by the association’s CC&Rs and National Reserve Study Standards.
As shown above, the Component List typically provides information about the assets including their expected Useful Life (UL), Remaining Useful Life (RUL), and Current Replacement Cost.
Reserve Fund Strength – Percent Funded
The current status of an association’s Reserve Fund is represented in terms of Percent Funded, and reveals how well past and current homeowners have budgeted for the repair and replacement of an association’s commonly shared assets.
An underfunded Reserve Fund indicates a higher likelihood of an eminent Special Assessment and increased HOA contribution levels. A strong Reserve Fund Strength means that the association is in strong fiscal standing, and unlikely to encounter cash flow deficiencies.
Recommend Funding Plan
All Reserve Studies come with a recommended funding plan for the association to follow in upcoming years. The Funding Plan is based off of the prior two results, and recommends adequate monthly, quarterly or yearly Reserve Contributions.
Reserve Studies prepared by Association Reserves and DIYReserveStudy.com include a detailed 30-Year Funding Plan for your association. Our Funding Plans avoid Special Assessments when possible, account for both interest and inflation, and have a Full Funding Objective.
So what is a Reserve Study? We believe it is an essential, helpful long term budgeting tool for associations, that should be updated and reviewed by the board annually.
Order your DIY Reserve Study Kit today!