An HOA reserve study includes a review of your HOA reserve funding to see how much you have in reserve for future maintenance, replacement and repair costs of the items you use in your common areas.
If you underfund your reserves, you may have to impose special assessments on your members. Some states require HOA reserve studies, and may also require specific funding levels for your reserves, as well. The details of your future reserve funding plan are included in your HOA reserve study.
If your state requires an HOA audit, your auditor will review your reserve fund study as part of the audit, and make sure you are audit-ready before they provide an opinion on your HOA’s finances.
In this post, we’ll explain:
- What Is a reserve study?
- What’s included in a reserve fund study?
- What is a component inventory?
- What is a condition assessment?
- Funding plans and HOA reserves
- Funding levels and ratings
- Reserve study requirements by state
- The role of your reserve fund study in your HOA audit
- Who prepares a reserve fund study?
What Is a Reserve Study?
A reserve study is a long-term plan you use to pay for major repairs and replacement of common-area components, like pool equipment, elevators, and even the roof of your clubhouse. Some states require reserve fund studies.
Reserve Fund Studies and Long-Term Planning
A reserve fund study helps you predict future expenses and budget for them. You use the study to take inventory of things you may need to replace in the future, and set aside enough reserve funds to cover future costs. It’s a long-term planning tool.
Planning for future expenses is often a better idea than relying on special assessments that require members to pay a large amount, all at once.
The Component Inventory and Condition Assessment
The component inventory is a list of common-area assets you may need to repair and replace within the next 30 years. Use four (4) tests to determine which items to include in the component inventory:
- Is it required by the HOA in the common-area?
- Does it have a limited useful life?
- Does it have a predictable remaining lifespan?
- Would replacement costs rise above a minimum threshold (dollar amount)?
The condition assessment is a physical inspection to determine the UL (useful life) and RUL (remaining useful life) of the items in your component inventory.
Funding Plan and Funding Your HOA Reserves
Your reserve specialist, usually a professional reserve study firm, architect and/or engineer, will prepare your HOA funding plan, which includes a 30-year budget to cover the cost of replacement items over time. Your specialist will review how much you have in current reserves, and establish your fully-funded balance (FFB), which is the ideal amount you should save to cover future replacements.
The reserve study will include an opinion on whether your HOA funding levels are considered weak, fair or strong. If your levels are weak or fair, you may have to levy special assessments on your members whenever you need to replace common-area items.
Your HOA board can choose which funding model to use, either fully funded, baseline funding or threshold funding. In many states, state law may require you to fund your reserves at a certain percentage.
**Make sure you know the HOA reserve fund requirements for your state before developing a funding plan.
Following is an explanation of each funding type:
Full Funding - the goal is 100% funding
Baseline Funding - your HOA will maintain funds in reserve, but not much. This keeps member contributions low, but can be risky, and you may need special assessments to cover future costs.
Threshold Funding - this style of funding establishes a threshold reserve percentage for you to maintain. This is less than full funding, but not as risky as baseline funding.
How HOA Reserve Funds Work: HOA Reserve Fund Requirements
HOA reserve fund requirements vary from state to state. To obtain a “strong” funding rating, you probably need to maintain over 70% in HOA reserve funds.
Many HOA and condo boards (up to 70%) underfund their reserves in order to offer low monthly fees low for residents and keep them happy. But if you never fund your reserves, eventually you’ll have to rely on special assessments. And your members won’t be happy about that unexpected expense.
It may be better to choose a reasonable funding level with predictable monthly fees than to impose special assessments on members and have to deal with the sticker shock.
Low HOA reserve funds can also make it difficult for potential buyers in your neighborhood to obtain financing, since many lenders consider HOA reserve funding levels during the residential loan process. Government-backed loans and conventional loans may refuse financing if you don’t meet their minimum HOA reserve fund requirements.
HOA Reserve Study Requirements by State
HOA reserve study requirements in the state of Washington include an updated reserve fund study with a visual site inspection every year, and a full reserve fund study every three (3) years for HOAs and condo associations with more than 10 units.
Each state has its own HOA reserve study requirements, with many variations. Hawaii, for example, requires you to maintain 50% in an HOA reserve fund. Florida requires a structural integrity reserve fund study every 10 years for condo associations with buildings over 3 stories or taller. That law took effect after the tragic collapse of a condo building in south Florida that killed 98 people.
There are exceptions. You should review the HOA laws in your state to determine if you’re required to complete an HOA reserve study, and remember that HOA reserve study requirements are always subject to change. Last year’s rules for HOA reserve studies in your state may not be this year’s rules.
What Does a Reserve Fund Study Cost?
Reserve fund study costs are based on multiple factors, including:
- The HOA reserve study requirements of your state
- Whether you need an updated reserve fund study or a full study
- The size and complexity of your HOA or condo association
- Whether you need a site inspection included in your reserve fund study
Most reserve studies cost less than 1% of your HOA’s annual budget. Online estimates range from $1,000 to over $10,000, depending on your property and location.
The Role of Your Reserve Fund in Your HOA Audit
HOA audits are one of our audit and assurance services. Your audit will include a review of your reserve fund study. Our auditors will review your reserve fund study to determine whether you’re appropriately tracking reserve spending and using a dedicated account just for reserves (which we highly recommend.)
We’ll also confirm that your reserve fund study aligns with your HOA’s financial statements. Having a recent reserve fund study can make your association’s audit proceed much more quickly, assuming your books are clean and up-to-date.
See how an HOA audit revealed reserve fund problems.
Your Reserve Fund Study Readiness Checklist
Once your reserve fund study is complete, it becomes an important part of your association’s next audit. You may be required to complete an audit by your state, your CC&Rs (your association’s Covenants, Conditions and Restrictions, the set of rules used to govern your association), or your bylaws. Lenders and insurance companies can also request an audit of your association.
Here’s a checklist to help you prepare for your audit:
- Locate your most recent reserve fund study and its date
- Reearch the audit requirements for your state
- Assemble the governing documents for your HOA
- Compare your current reserve funding percentage to your funding plan
- Reconcile your reserve account to the schedule in your reserve fund study
- Flag any common-use components that are past their useful life
- Bring your reserve fund study and reserve schedule to your auditor
HOA Reserve Study: Frequently Asked Questions
Is a reserve study the same as an audit?
A reserve study is not the same as an audit. A reserve study is usually completed by a professional reserve study company, engineer and/or architect. Many states require reserve studies and have particular requirements for what you have to include in them.
A reserve fund study specifically establishes a funding plan to help you budget for maintenance, repairs and replacement of your common-area assets. An audit is usually completed by a CPA audit firm. It looks at your association as a whole. Reserves are only one part of the auditor’s review.
Your HOA board needs to hire two different types of specialists: 1) A reserve specialist to do the reserve study, and 2) an auditor to complete the audit for the entire association.
How often does an HOA need a reserve fund study?
How often an HOA needs a reserve study is usually dictated by your state’s HOA reserve study requirements. Some states require an annual reserve fund study update, with a full study completed every three years.
Research your state’s HOA reserve study requirements to make sure you are in compliance with state law, and remember that the requirements can change at any time. You’ll want to review them at least annually to stay informed of any changes in HOA reserve study requirements in your state.
Who prepares a reserve fund study?
A reserve fund study is usually completed by a professional reserve study company, engineer and/or architect. This is distinct from an audit that reviews your HOA as a whole. Audits are often performed by CPA audit firms.
What happens if our reserves are underfunded at audit time?
If your reserves are underfunded when it’s time for your association audit, your audit will reflect that. Some states require a specific level of reserve funding, and you may need to act quickly to resolve any funding shortfalls. That could mean immediately taking out a loan or increasing member fees.
Underfunding your HOA reserves can make it difficult for homebuyers to obtain financing, especially if they want to use a government-backed or conventional loan to purchase one of your units. Your HOA reserve study will identify any concerns about weak funding levels, and include a plan to fund your HOA reserves appropriately going forward. See a real example of HOA reserve problems discovered during an HOA audit.
Are You Ready for Your Audit?
Once your HOA reserve study is done, you’re ready to begin preparing for your HOA audit. Request a FREE consultation to get started. We can help answer your questions and get you going in the right direction.