Reserve
funds are essential for any association. When an unscheduled financial
obligation or emergency occurs, you have somewhere to withdraw cash without
disorganizing the company's set budget. That's why associations set up reserve
funds in highly liquid accounts, such as savings account. But for you to put in
place a reserve fund, you need to be aware of your long-term vision and plans.
This is where a reserve study comes in; the in-depth research from a reserve
study helps you plan accordingly to avoid crippling the association's running
due to unexpected financial disaster.
What is a reserve study?
A
reserve study is also known as a reserve fund
study. It is an extensive assessment of
the association’s property to determine the amount needed for the reserve fund
over an extended period. An independent entity often evaluates the property
leading to transparent and solution-oriented results. The study will include
the current state of your property (things like roofing, painting, recreation
areas, etc.) Generally, a reserve
fund study will let you know the following;
- The lifespan of an item/ useful life.
- The remaining useful life/ the item’s
timeline before you have to replace it.
- The current and potential future cost of
an item.
This
information is crucial when an association, such as the condominium or
homeowners association, creates a new budget. An excellent reserve study will
give you a detailed report covering repairs, maintenance, and emergencies for
the next 20-30 years or more. It is an intricate process, and that’s why an
independent agency specializing in reserve fund studies is necessary.
Why do associations need a reserve study?
It
is easy to assume that you have everything under control regarding budgeting
and allocating money to your reserve fund. But here are four crucial reasons
why you need to look into a reserve fund study.
It’s a state law requirement
Believe
it or not, the law requires condominiums, homeowners associations, and other
organizations to conduct a reserve
fund study. For example, the California Civil Code 5550 requires you to
use a certified agency for in-depth research of your assets. However, the law
isn’t active in all states.
Upholding property value
When
you identify potential repairs and set aside funds for unforeseen emergencies,
you don’t have to worry about diminishing your property’s worth. A reserve
study identifies the lifespan, repair timeline, and the amount needed to take
care of your property over an extended period.
Fulfilling board of directors’ responsibility
In
every association, the members look up to the directors for leadership and
guidance. The board of directors organizes reserve fund studies to act in the
best interests of the association members. The members require transparency and
long-term property security. Furthermore, the board of directors is legally
bound to create a promising reserve fund for the association.
Helps in planning the budget
There's
nothing more hectic than a budget season for most organizations. You need to
account for every cent and ensure every department is covered. Reserve funds
can be a tricky area because the money is set aside for long-term use. It is
easy to downplay the urgency. But when you introduce a reserve fund study, you can see where
every coin goes, streamlining budget planning.
