By Bryan Farley, RS, Association Reserves
What makes a board successful? Is it keeping the dues low? Is it based on the total number of complaints on the neighborhood Facebook page? How does a board know whether they are on track, or falling behind? After completing over 45,000 Reserve Studies, our firm has seen the successes and failures of many properties in regard to funding their Reserves. There are a few common themes that we see over and over, and this article will present a simple ‘How To’ Guide on helping your property avoid the common pitfalls that clients make as well as highlight the simple solutions to these issues.
Common Mistake #1 – Not Having a Professionally Completed Reserve Study
While I admire the Do-It-Yourself attitude when it comes to building a bookshelf from beetle-kill pine (I sometimes struggle with assembling Ikea furniture), there is too much at stake for a board member to prepare a Reserve Study. Yes, your board member may be a retired engineer who knows his way around a spreadsheet, but that is not the point. A professional Reserve Study provider (including either a Reserve Specialist or Professional Reserve Analyst) is a non-biased, third-party expert that is only concerned with providing accurate information for the association.
When a board member or owner puts together a Reserve Study, there may be an opportunity to skew the numbers to achieve better outcomes since there is a lack of oversight. A professional Reserve Study provider has the training (for example, CAI requires a three-year apprenticeship to become a credentialed Reserve Specialist) to complete the job well, in order to serve their clients with a reliable report.
It may seem tempting to complete a Reserve Study ‘in-house’ to save a few bucks, but that money saved could turn into a special assessment in a few years.
A wise association will hire a credentialed expert to complete the Reserve Study in order to provide clarity constant and ongoing deterioration of their property.
Common Mistake #2 - Not Updating A Reserve Study
Why should a property update their Reserve Study? Is this document good for 20-30 years? This is a question that we do receive on a regular basis. I tend to respond and ask how often their association updates their budget, to which they reply – every year. For a typical property, reserve contributions make up to 25%-45% of the total budget. That is a big piece of the budget pie, therefore it is important that the Reserve Study, which provides the recommendation for contribution rate, be up to date and accurate. A client wouldn’t use a roofing bid from 2012 to budget for their 2020 roof replacement project, yet many clients do this with their Reserve Study.
Updating a Reserve Study will not only provide accurate information to a board making long lasting financial decisions, but it will also save owners money.
We found that associations who update their Reserve Studies every five years enjoy a 35.1% decrease in special assessments when they shift to updating their Reserve Study annually.
Associations who update their Reserve Studies every three years enjoy a 28.5% decrease in special assessments when they shift to updating their Reserve Study annually.
It doesn’t matter what Colorado state law says about Reserve Study update requirements: Special assessments are disruptive, divisive, and predictable years in advance everywhere. Put time on your side by updating your Reserve Study annually, significantly lowering your exposure to special assessments.
Common Mistake #3- Saving Money by Deferring Maintenance
There are some boards out there that intentionally or unintentionally avoid reserving for a project since the board is interested in keeping costs down. This strategy is like not paying taxes on April 15th to save money for your vacation. It does not matter whether the board decides to reserve for a project or not, the project will be due and will most likely be costly.
Here is a quick example of what I mean; Imagine that your building’s roof needs to be replaced in 15 years and will cost about $250,000 to replace. Did you know that you can actually replace this roof for $232,000? This is possible thanks to compounding interest. If the board decided to put money away every year, even with nominal 1% interest, the ownership will save $18,000 by proactive stewardship.
What about current owners? What if an owner is planning to move before that 15-year roof is due? Well, adequate reserves equates to better home values. We found that home values were 12.6% higher in associations with a strong (over 70% Funded) Reserve Fund than homes in associations with a weak (under 30% Funded) Reserve Fund. Assuming an average sale price of a condominium is about $400,000, this means that units in associations with a strong Reserve Fund can sell for $50,000 more than units in associations with a weak Reserve Fund. It pays to adequately fund the Reserve Fund.
Common Mistake #4 - A Reserve Study is for the Future
A Reserve Study is not a rainy-day fund, a slush fund, or a ‘nice to have’ fund. Reserves are for current and ongoing deterioration. A roof does not just fail overnight, but rather month by month the roof becomes older and deterioration starts to show. We try to explain to clients that the roof (or any other common area asset) has a monthly bill that needs to be paid. However, unlike your monthly water bill, no one will shut off your roof if you neglect to pay the monthly roof deterioration bill. That is why a Reserve Study is important; it clearly describes to owners what the monthly deterioration ‘bill’ is.
If you hear people at your property start to say –“Reserves are for the future”, or “A Reserve Study will show us how much money we’ll need in twenty years” – quickly correct them. Once a conversation starts drifting towards the future, human nature tends to assume that ‘someone else’ will take care of it; whereas if we frame the problem of underfunding reserves as a material issue, boards will have to take responsibility for their actions.
I hope that this article has highlighted the benefits of having a credentialed Reserve professional update and complete a Reserve Study for your property so that your board will budget appropriately for the ongoing and inevitable deterioration occurring at your property.
Bryan is the president of Association Reserves – Rocky Mountains. Bryan has completed over 2,000 Reserve Studies and earned the Community Associations Institute (CAI) designation of Reserve Specialist (RS #260). His experience includes all types of condominium and homeowners’ associations throughout the United States, ranging from international high-rises to historical monuments.