Reserve Studies 101
For developers of small communities
What is a reserve study and why do I have to have one? Eight things to know about reserve studies for small projects
If your development requires a reserve study, you may want to better understand that obligation and its impact on your project. The reserve study can balance a responsible plan for future owners against project costs and impact on the HOA fees that buyers will see in the sales process.
Some reserve studies can send HOA fees skyrocketing. Others omit things to keep owner fees artificially low. What’s the balance between responsible planning and fees that support sales?
A basic understanding of the reserve study and how it affects your project will help you to be confident that you’re doing this requirement right.
1. What is a reserve study?
Reserve studies can be daunting…page after page of maintenance schedules, actuarial tables, funding percentages, variable contributions, and inflation rates. Plus hard to read charts and actuarial tables galore! It’s a complicated report, but essentially is a well planned maintenance schedule with a clear savings plan, for obligations that the owners share.
The reserve study is:
-An assessment of long term maintenance needs for an HOA’s common property
-A financial plan for the association to fund that maintenance
-A report on the community’s status on that funding (this is important for owners later)
2. Are there different options, and what does my project need?
The type of reserve study that’s most commonly prepared for developers is called the Preliminary, Community Not Yet Constructed study type. It is based on design documents such as the architectural and engineering plans. and is used for HOA budget estimates.
Other standard types of reserve studies are a Full Reserve Study, an Update with Site Visit, and an Update No Site Visit.
The study types are outlined by the Best Practices: Reserve Studies and Management paper by the Foundation for Community Association Research and its parent organization, Community Associations Institute (CAI).
3. Does my project need a reserve study?
This is an important starting place for developers of small projects. The requirement of a reserve study is determined by the state you are building in, and whether the HOA has any shared or common property, elements, or area. The shared obligations will be outlined by the attorney who does your HOA declaration or covenants.
If your HOA has no shared or common property whatsoever, a reserve study may not be required. Some very small HOAs have no common obligations whatsoever. Confirm the status of your project with your organizing attorney.
California, Delaware, Hawaii, Nevada, Oregon, Utah, Virginia, Washington, Ohio, Illinois, and Nevada have requirements, although some make exceptions for very small HOAs. Similar legislation is pending in other states.
4. Ability to sell with federally backed mortgages
If your project is legally organized as a condominium, then there is another very important reason for a reserve study: the ability to sell a home in the community with conventional mortgage lending.
The current requirement for mortgage lenders with loans backed by FHA, Fannie Mae, and Freddie Mac is that the condominium association must include reserve funding of at least 10 percent of the budget. That means if your HOA doesn’t comply with those requirements, then a sale may not qualify for a mortgage with federal backing. That will have a negative impact on sales in your community.
5. A good reserve study can be a sales advantage.
. It’s understandable that you want to keep HOA fees low. But keep in mind that more agents and prospects are savvy and looking for a realistic long term plan for shared owner obligations. Prospective buyers and their advisers often consider responsible planning and financial health of an HOA before purchasing a property. They know it will protect the value of their property.
Your listing agent can present your HOA fees as evidence of quality, integrity, and value. Sales materials can be prepared with comparisons to show your value, and show how what’s left out of other fees can actually cost the buyer more. Check this post for more information: https://www.microhoa.com/developer-resources/everyone-loves-low-hoa-fees
6. Elements of the reserve study
A reserve study is made up of two parts, the physical analysis and the financial analysis.
The physical analysis includes the component inventory, valuation, and remaining useful life of the component.
Components are things like roofs, fences, driveways, and community mailboxes. The initial component inventory is determined by the community’s declaration or covenants. Quantity and installation costs are pulled from the project. The ‘remaining useful life’ of each component is evaluated to determine when they need replacement or repair. The valuation is an estimate of the cost of the replacement
From Reserve Study and Reserve Management Best Practices, Community Association Institute
The financial analysis is the projection of future funding needs and a recommendation for an appropriate reserve contribution rate. For your reserve study, you’ll need to provide the cost at installation for the identified reserve components. From those numbers, the reserve study provider will project the funding plan.
That funding plan determines the amount that each homeowner must contribute to the HOA. This is the HOA fee that buyers will see as they consider your property.
7. Who does the reserve study?
A reserve study is not a DIY project. Unless you are experienced with accounting necessary to project inflation rates, compounding funds, and distribution of funding over time and between units, this is a job for a professional.
Reserve study providers are professionals who will:
-develop your component list,
-determine replacement costs,
-know the standards of useful life on your components,
-calculate replacement costs and funding;
-project contributions based upon needs, inflation, and interest;
-distribute funding over time and by unit;
-adjust contributions to fit financial planning;
-provide a report for your HOA and sales disclosures.
8. One size does not fit all.
The reserve study for your small development should not cost the same as one for a high-rise condominium or a master planned community. More complete studies with site visits and revised estimating will be more expensive. For small communities, the study will be done from your project plans, and may not require site visits. That should keep your costs lower.
Also, if your reserve study provider is also doing your project’s HOA budget, watch the costs of reserve study updates. Depending upon the status of your reserve study, it doesn’t need to cost hundreds of dollars for a small HOA reserve study update. This will be a line item of your project’s HOA budget, and can unnecessarily increase owner fees.
If you are developing small projects, MicroHOA can help with all aspects of your HOA obligations. We know what your project needs…and doesn’t need… for lower project costs and balance of a responsible plan for HOA transition and turnover.
