Qualifying Your Reserve Study Provider
A reserve study is one of the most indispensable planning tools an HOA can have. And like a roof, getting the best bang for your buck is the way to go. The best reserve studies are put together by trained industry professionals. But unlike roofing companies, there are only a handful of qualified reserve study providers in the world. How could this be true?
HOA reserve studies are relatively new phenomenon’s. The need for reserve studies became painfully apparent in the 1980s when condominiums built in the 1960s began to have widespread failure of common elements like roofing, fences, decks, paving, siding and other long life components.
In the 1960s, developers marketed condos as “carefree living” and promised buyers that maintenance and repairs would be taken care of by the association of unit owners. All individual unit owners had to do was contribute money to a pot and the rest was “handled”. This all sounded too good to be true and was. Most of those developers failed to provide a long range plan (reserve study) and a funding plan to pay for very predictable and expensive future events. Not only that, the budget provided to the initial board was often woefully inadequate to pay for even routine day-to-day maintenance. It was all a setup to fail of nightmarish proportions.
To make matters worse, some of these developers wrote budget restrictions in the governing documents that prevented the board from increasing the budget without approval of a large block of members (sometimes 100% of them). These boards were effectively prevented from raising the money they needed to maintain the HOA and member assets. They started in a hole which just got deeper with passing years.
By the 1980s, natural deterioration had caused failure of many building and grounds components. It became apparent in states with large numbers of HOAs like Florida and California that better planning and requirements were needed to avoid this kind of predictable failure. In those states, legislation was adopted that required reserve planning. Thus, the concept was born and the need for qualified service providers to accomplish the work.
Unfortunately, there was no formal training available for reserve study providers. Those that engaged in it had varying types of backgrounds like accounting, engineering, building inspection, construction estimating or HOA management. Some had no related experience whatsoever. And no state licensing was required. This is still largely true today. Only Nevada has a requirement for reserve study providers (to get a permit).
So what should a homeowner association board or manager look for in a good reserve study provider?
Years of Experience. Reserve study providers learn their trade on the job. While having related education is helpful, actual experience doing the work is more important, the longer the better. Reserve study providers make judgments on designs and materials which have useful lives of 30 years or more. The longer the provider has been actually making these judgment calls, the more accurate they are. It’s the same reason you shouldn’t hire a brand new roofing company to put on a roof. This is intended to be a very long relationship. Don’t hire a company just because they want your business. Hire the company based on demonstrated experience.
Understands HOA Politics. As the name suggests, homeowner associations represent a collection of homes, not investment property. As such, the individual owners take a keen interest in how their home is maintained. So, while the board is authorized to make decisions, owners often weigh in on those decisions and watch closely how things are handled.
Understands HOA Operations. Doing repairs on owner-occupied buildings creates additional challenges and costs. Painting buildings and sealcoating parking lots takes careful advanced planning and coordination. Just forget to warn residents in advance and watch the you-know-what hit the fan.
Ability to Communicate Clearly. The reserve study itself is a compilation of numbers, percentage rates, dollar amounts and descriptions. If the information is not organized in a user friendly format, the board and members won’t understand or use it. When soliciting proposals, always get a sample reserve study to make sure you “get it”.
Report Complies with Governing Documents. The HOA governing documents are the guiding light for what goes into a reserve study. Many boards are surprised to discover their HOA has been maintaining things it shouldn’t and neglecting to repair things it should.
Report Complies with State Statute. A growing number of states have specific legislation that triggers requirements in the reserve study over and above what is required in the governing documents.
Includes Additional Reserve Components. The reserve study can include a number of items that aren’t required by statute or the governing documents. It can be used to add items or fund special items, such as:
- Insurance Deductible. Lenders are now required to verify an insurance reserve equal to the HOA policy deductible.
- Contingency. Since the future is uncertain, adding a contingency fund of, say, $10,000 to address this often makes sense
- Wish List. Additional items that don’t currently exist can be added to the reserve study to build funding over a period of years.
Main Focus of Business. Doing reserve studies should be the prime focus of a qualified reserve study provider. If it’s just one of many services offered, you’re not likely to get the kind of quality information you need.
Long List of Satisfied Customers. This goes with the experience thing. A qualified provider should be able to demonstrate a long list of satisfied clients with comparable properties to yours.
Credentials to Prove Experience. This is a big one. Since no formal education is available to train, experience and credentials are paramount. When it comes to credentials, the Association of Professional Reserve Analysts offers the Professional Reserve Analyst (PRA) credential to members who have a minimum of three years performing reserve studies and a work product that reflects all components of a well executed reserve study. For a list of PRA members, go to www.aprausa.com
The implications of a badly done reserve study are long lasting. Don’t be fooled by low bids from inexperienced companies. Only consider proposals from those that have the credentials and experience to do this work.
Published in The Regenesis Report – September 2008