Today’s topic is an important one: HOA reserves.
How do you know how much your community needs to have in its reserves? And, do you know how to raise the required amount?
This is about securing the future of your community, providing peace of mind to your homeowners, and ensuring you’re able to provide all of the support and resources that your community is likely to need over the next few years.
As HOA managers in Albuquerque, we work with board members and HOA leaders all the time on budgets, financial health, and reserves. We know that reserve studies are valuable, and we think they can be an important tool in establishing the necessary stability for your HOA.
What Are HOA Reserves?
HOA reserves are funds set aside by a homeowners association to cover future major expenses and unforeseen emergencies. These funds are separate from the regular operating budget, which typically covers day-to-day expenses like landscaping, utilities, and maintenance. Reserves are essentially a savings account for the community, ensuring that there are sufficient funds available for larger projects or unexpected costs without having to impose special assessments on homeowners.
Why Are Reserves So Important to an HOA in Albuquerque?
Reserves play a critical role in maintaining the value and appeal of your community.
Here’s a Quick Look at why they matter.
| Financial Stability
A well-funded reserve ensures that your community can address large-scale repairs and replacements without financial strain on the community as a whole or the homeowners individually. This stability protects homeowners from sudden, hefty assessments that can be shocking, destabilizing, and controversial. |
Property Value Preservation
Regular maintenance and timely repairs funded by reserves help maintain property values throughout the community. It also keeps communal amenities and shared spaces intact and functioning. A community with well-kept amenities is more attractive to potential buyers, benefiting all residents. |
Avoidance of Special Assessments
Without adequate reserves, HOAs may need to charge additional fees, known as special assessments, to cover unexpected expenses. These can be burdensome for homeowners and may lead to financial strain for those unprepared. |
How Do HOA Reserves Affect You?
As an HOA board member, you’re responsible for communicating information to your homeowners, such as the state of your community’s reserves and why it matters to them. Here are the implications you should be sharing with the entire association:
- Budget Contributions
Part of each homeowner’s monthly or quarterly dues will be allocated to the reserves. Adequate funding reduces the likelihood of special assessments.
- Community Condition
Well-funded reserves ensure that your community’s common areas and facilities remain in good condition, enhancing your quality of life and your ability to attract new homebuyers to the community.
- Financial Health
A strong reserve fund contributes to the community’s financial health and can impact the desirability and marketability of your home. Homeowners may be thinking about their eventual resale value, and this will be impactful.
How are Reserve Funds Calculated and Managed?
To determine how much should be in the reserves, HOAs typically conduct a reserve study.
This study assesses the community’s assets, estimates their useful lifespan, and forecasts the cost of future repairs or replacements. Based on this analysis, a funding plan is created to ensure reserves are sufficient to meet these needs over time.
We are going to dive deep into reserve studies so you can be sure your HOA is on track.
Different Types of HOA Reserve Studies
Not all reserve studies are created alike, and the type of study you want will depend on your community, the level of involvement your board desires, and the investment you’re willing to make into accessing this important information.
| Preliminary Study
At its most basic level, the preliminary reserve study is often conducted before a community is even built. The ship has likely already sailed on this one for you. You’re serving an HOA that already exists, so unless a preliminary study was done before it was built, this is likely not the type of study you’ll want to invest in. However, if the time comes that you have plans for a new community, a preliminary reserve study can be beneficial in creating budgets for architectural and construction plans. This sets a benchmark for HOA value as plans are developed. |
Study with a Site Visit
A reserve study that includes a site visit includes a physical audit of the property and its value. This is a comprehensive analysis that can tell you where your reserve fund is right now, and what might be needed in the future based on how the property looks and operates. Because the analysis is done in person, at your HOA, you’re getting the best and most detailed information that’s available. Schedule a reserve study with a site visit if your HOA has not been studied in a while or ever before. This will be an excellent and thorough starting point for how you structure your budgets and your reserves. |
| Study with No Site Visit
An on-site visit is not absolutely required in order to get a reserve study completed. It’s the most affordable way to get an idea of what you should have in your reserves for your HOA to remain financially healthy and prepared for the future. There will be a review of financials, discussions with HOA board members, and a look at property records and relevant documents. |
Full Reserve Study
This is the most complex and detailed option for HOA boards who want to leave no stone unturned. This will be an expensive study, but it’s an excellent way to get started if you find yourself serving a new HOA. There will be inventories, financial assessments, a review of systems, and a full inspection of every part of the property. |
Reserve studies for your HOA will include both a physical analysis and a financial analysis.
- Financial Analysis in an HOA Reserve Study
Your HOA’s financial analysis is the part of the review study that will focus on evaluating the association’s current financial status and projecting future reserve funding requirements. It answers the question: “Do we have enough money to cover future expenses?”
Components include:
- Current Reserve Fund Status. An overview of the existing reserve funds available.
- Income and Expense Forecasts. Projections of future fund contributions and expenditures.
- Funding Plan Options. Recommendations for how to fund future repairs and replacements, including contribution increases or special assessments if necessary.
Benefits of the financial analysis include budget planning and the establishment of financial health. You’ll be able to set realistic budgets for your HOA and prevent unexpected financial shortfalls. You’ll also get a clear picture of the association’s financial health, which will reassure your current homeowners and prospective buyers.
- Physical Analysis in an HOA Reserve Study
The physical analysis assesses the condition and lifespan of community assets. It answers the question: “What needs to be repaired or replaced, and when?”
Components include:
- Component Inventory. A comprehensive list of all the assets owned by the association, such as roofs, pools, landscaping, and more.
- Condition Assessment. Evaluation of the current condition of each asset.
- Estimated Lifespans. Predictions of when repairs or replacements will be necessary.
This is especially beneficial when it comes to preventative maintenance. Your HOA board can identify maintenance needs before they become costly, deferred repairs. It’s also necessary for smart asset management. By understanding the condition of assets, HOA boards can prioritize and plan for future projects effectively.
How Financial and Physical Analyses Work Together
The financial and physical analyses in a reserve study are interdependent. While the physical analysis identifies what needs attention and when, the financial analysis ensures that funds are available to address these needs. Together, they enable HOA boards to make strategic decisions that safeguard the community’s quality and financial stability.
By conducting regular HOA reserve studies, board members can proactively manage their community’s assets, ensuring they remain safe, functional, and attractive for years to come.
How to Use Your HOA Reserve Study in Albuquerque
Unlike other states, New Mexico does not have a legal requirement that HOAs must have a reserve study completed. You’re not legally required to allocate any of your community’s funds to a reserve study.
However, as we’ve discussed, it’s a good and necessary idea.
What are some of the ways your HOA board might use the reserve study that you’ve invested in?
- Insurance and Loans
Use your reserve study when you’re applying for loans, refinancing existing loans, or even buying insurance. HOA reserve studies are likely to be requested from banks, lenders, and other professionals in the local Albuquerque real estate and property industries.
Before lenders are willing to work with you and your HOA, they’ll need an idea of your association’s financial health and approach to risk. Most lenders are looking for a minimum 12-month reserve study that’s been performed by a known and reputable reserve study company.
- Plan and Budget for Renovations and Repairs
Your reserve study might have revealed things that your association needs. There might be structural issues you’ll want to address, such as roof repairs or re-paving. You might need a stronger fence around the perimeter or a new gate at the entry. With your reserve study, you can begin to gather quotes and schedule vendors since you’ll have an idea of costs.
- Prioritize Projects
With insights from the reserve study, community associations can prioritize projects based on urgency and available funding. This ensures that essential maintenance and replacements are addressed promptly.
- Set Reasonable Assessments
Use the data from the reserve study to set fair and reasonable HOA fees. By aligning assessments with projected expenses, associations can avoid unexpected financial burdens on homeowners.
- Attract New Homebuyers to Your Albuquerque Community
A reserve study inspires confidence in your existing homeowners and in any new residents who may be considering a home in your community. Use your reserve study when potential buyers are asking for things like the community bylaws and the HOA rules and regulations. When you include the reserve study, you’re showing potential new residents that they’d be living in a community that’s financially secure and aware.
Having a well-prepared reserve study signals that the association is well-managed, financially sound, and committed to maintaining property values.
Preparing Your HOA for a Reserve Study: Essential Steps
What will happen when it’s time for your reserve study to take place, and what can you do to prepare for it? Here is what you can expect:
| Component Analysis
If you’ve opted for an on-site reserve study, there will be a component analysis performed during that on-site inspection of community areas. It evaluates the quantity of components, their value, and their life expectancy. Think about paint, fences, security gates, elevators, roofs, and even your HVAC system. |
Financial Summary
Expect a complete financial review, which will take a look at the money that’s currently being held in the HOA’s reserves. The reserve study will determine whether it’s enough to pay for the planned and projected repairs, renovations, and work that the HOA will need. |
List of Responsibilities
There’s also an accountability element to the reserve study. You can expect a list of who owns which projects that the HOA is undertaking or planning. This may be a committee or a team as well as a single individual. The board will need specific roles and responsibilities laid out. |
| Projections
The reserve study will also include projected expenditures for future repairs, which is going to be important as your HOA budgets. Avoiding surprises is the goal here, and your reserve study will show which repairs are likely to be needed and what they’ll cost. |
Action Plan
A good reserve study includes a detailed action plan for the HOA. You’ll want to communicate this to all of your homeowners, so they understand what kind of work is planned for the coming months or years, and how the association plans to approach it. |
Funding Plan
Action plans are great, but how will those actions be paid for? That’s the funding plan portion of your reserve study. It’s essential to be transparent with where the money will come from and how the expenses will be met. |
Steps to Take As You Prepare
1.Form a Reserve Study Committee
Assign a team to oversee the reserve study process. You’ll need volunteers from your community, and at least one board member should be part of the committee. Ensure regular updates are provided during board meetings, and make sure your community as a whole understands what’s being done.
2.Define the Study’s Scope
Decide on the level of detail needed. Does the HOA prefer a quick overview or a comprehensive study, including a site inspection? This is something you’ll need to establish before you get too far into the process.
3.Collect Financial and Property Data
Organize all necessary financial and property details to ensure a smooth and efficient study. This should be the work of the HOA treasurer, the board, and the reserve study committee that has been assembled to manage the process.
4.Hire a Qualified Professional
Engage an HOA management company experienced in reserve studies to minimize risks and meet the requirements and the scope you’ve established. Your reserve study will ultimately impact the business your HOA is able to do, impacting potential loans or insurance. You want to work with someone who has an excellent reputation.
5.Review and Approve the Study
Once completed, have the board verify the study for accuracy and clarity before giving final approval. There may be a dialogue between the board and the professional who completed the reserve study. Always ask for clarifications or explanations so you can easily and completely share this study and its results with all of your association’s homeowners.
6.Create a Funding Strategy
Now that you have the study, it’s time to use it. Plan how to finance repairs, whether by raising dues or making investments or securing loans, to maintain the reserve fund.
7.Share Results with the Community
The results will need to be made public after the board has had time to review them. Keep residents informed about what the reserve study revealed and how it will impact upcoming projects. Commit to financial transparency and notify your residents in advance of any changes or work, whether we’re talking about a new landscaping project or ongoing pool maintenance.
8.Regularly Update the Study
Continuously refresh the study to reflect changes in assets and property conditions, ensuring accurate and current data. Best practices say that the reserve study should be reviewed annually and re-conducted every three years.
This is just about everything we can tell you about reserve studies, as your Albuquerque HOA property management resource. We have been working with HOAs in Albuquerque on their reserves for years. Whether you’re a large HOA or a small community association; a new neighborhood or an established community with a lot of history, we can help you keep your people and your properties financially secure. Let’s talk about how a reserve study can impact your HOA specifically. Please contact us at Blue Door Realty.
