Understanding the Importance of a Reserve Study for a Property

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Although a reserve study is mandated by law, a lot of property owners willingly invest in it because of its significant benefits.

What is a reserve study?

A reserve study is a study where the condition of a property’s common elements are assessed to have a better and relevant calculation of the reserve fund which will be used for its repair, replacement, and upkeep at the present and in the future. Most custom reserve studies come with a computer-generated calculation considering various essential factors like the cost and the remaining lives of the components.

Moreover, a reserve study needs to be readable. Hence, the information indicated in the papers should be detailed and using simple terms, e.g. local project costs, specific practices, and other contents. The purpose of the document is to provide information that will help property owners manage their assets with confidence.

What is in the reserve study?

A reserve study, ideally conducted by a team of professional engineers, architects, and/or construction management degree holders, comprises a number of sections detailing a realistic funding plan and costing recommendations. If it is a comprehensive one, the report will cover the following:

1. An Executive Summary

This will detail a suggested project prioritization with basis and justification, covering major and near-term projects. Recommendations and key findings will also be included in a readable presentation.

2. Tables & Graphs

In most reserve studies, there will also tables and graphs representing and discussing current and proposed expenditures, funding plans, and reserve funding. The funding plan will show proposals for reserve contributions in tables to ensure enough funding for projects in the future. This will also define the possibility of homeowners having to deal with special assessments.  

Meanwhile, the reserve funding will be presented in a graph to easily describe the plan to stakeholders or homeowners (for homeowner’s association). The graph will most likely be covering yearly expenditures, contributes, and the balance for the next years.

3. Comprehensive Report

This report will cover particular insights for each component of a property, such as each component’s condition, and the amount needed to be raised for vital replacements and repairs. Moreover, the report will be detailing early signs of damage that need urgent action or solution to ensure isolation of the problem.

Other components of the report include:

• In-depth data presentation and diagrams of particular projects that will help property owners and stakeholders easily compare the bids of potential contractors.
• Detailed report discussing the scope of future projects. This will also state the construction methodology options and best practices to consider.

Reasons Why a Reserve Study is Important

Aside from the fact that a reserve study is mandated by most state’s laws to properly disclose reserves, there are other good reasons why you should have one conducted for your property:

1. It will help you maintain the good appearance and high value of your property.

The study will identify and calculate adequate budgets for essential property improvements in the future should you intend to keep its value and market the property. If you skip this part, you will most likely end up with two fates: the fate to face a financial burden in trying to keep your property attractive; and the fate to do nothing because you are financially incapacitated.

2. If it is a commercial property or homeowners’ association, a reserve study will help fulfill the judiciary responsibility of the board to the members.

The board of directors is mandated to use sound judgment in making business decisions and guiding the community. That said, major capital expenditures must be tackled diligently when budget planning.

3. It will help build relevant financial planning.

The study will soundly plan a major repair or replacement schedule for a property’s vital components and will also tackle cost estimation. It will help ensure that full funding is facilitated to cover both unexpected and anticipated costs. Experts call it the future’s blueprint.

However, it should be clear that a reserve study is considered a mere guide like in annual budgeting. On that note, stakeholders and property owners should not feel pressured to commit to the projects and strictly follow all of the recommendations therein. Other projects may be postponed or left as recommendations.

To ensure relevant reserve funding, a reserve study must be reviewed and probably revamped after completion of every major project.

How to involve yourself as the property owner or board member in the reserve study?

During the course of the study, it is best not to fully entrust the job with the specialists. You have to guide them throughout. Here’s how:

1. Join the reserve study specialists as they perform the first property inspection. The point of this is to make sure they have a full understanding of your entity’s responsibility to the community. Plus, you also have to understand the parameters at hand as the owner or board member

During the inspection, you also have the task to inform the specialists which components cannot be touched, repaired, nor replaced. So, before the schedule, it would help going over your governing papers first or seeking legal counsel to better understand the scope of the property.

2. Go over your history. This entails gathering and going over all the previous and current financials and contracts to give you a clue as to how complex and long the previous projects took to completion and how much was spent for each component.  

3. Be active in discussing future plans. You and your reserve study team have to be working on the same page to ensure that your wants and needs are also taken into consideration. The funding will cover necessary repairs and replacements but should you want to go for a more aesthetic renovation or an upgrade, the cost should be included in the budget planning too.

There is a likelihood that some projects that may have been included in the study will be subject to deferment. If you and your co-members or owners decide to choose that path, bear in mind that discussing the overall costs is vital in arriving with a reasonable and cost-effective solution.

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