A reserve study is an indispensable planning tool to schedule major renovation and systematically raise the money to pay for it without the use of special assessments. It is also extremely important to update the reserve study each and every year since there are many moving parts that change each year and impact both the schedule and funding needs, such as:
1. Component cost changes that happen frequently can dramatically change the reserve study projections.
2. Rate of Inflation. Changes every year and directly affects future dollar needs.
3. Return on Invested Reserves. Changes every year and directly affects future owner contributions.
4. Balance of money in reserves. Changes every year and impacts funding recommendations.
5. Component Useful Lives. Can change for some components and affect the renovation schedule. Site inspections are recommended at least every three years for accurate useful life projections. When a reserve study is originally performed, each component is assigned a life expectancy based on current condition, quality of installation, preventive maintenance and affects of weather.
6. Cost of Renovation. Could change for some components and impact future dollar needs.
7. Changes to state statute can affect how the reserve study is done.
8. Lenders require a current reserve study. FHA, Fannie Mae and Freddie Mac underwrite the majority of homeowner association loans. As a condition of loan approval, they require a reserve study current within 12 months. If the board cannot provide it, members run the risk of having their refinance or buyer loans denied.
Some boards may be tempted to do annual reserve study updates to save money. This can possibly work if there is a board member that specializes in construction cost estimating. However, for the vast majority, the results will be shooting in the dark since very few boards have the expertise to perform an in-house reserve study. In most cases, the reserve study should be done by a qualified professional like a Professional Reserve Analyst (PRA) member of the Association of Professional Reserve Analysts. See www.apra-usa.com for a list of members. The costs are reasonably priced and the results are professional, informed and accurate. Why would the board not want to take advantage of a service provided by a qualified professional?
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