There are many alternative reserve study strategies available. This month’s installment in the Reserve Study series focuses on just that. There are some clearly significant pros and cons attached to each strategy. The important thing is to take advantage of at least one of the methods and be aware of the consequences of your choice.
The first thing to recognize is that the formal reserve study performed by a credentialed practitioner is not a marketplace sand trap designed to take advantage of callow unsuspecting condo and HOA owners. These studies are basic to almost all professionally managed real estate. They are integral to good management. Having your manager do the reserve study seems like the simplest and cheapest way out. After all, isn’t it a basic responsibility of the management company to be aware of the state of repair of the building? Aren’t they on-site regularly and the most familiar with the property nuances? Why pay a hired gun to come in and reinvent the wheel?
Here’s a thought. The reserve study embraces two important specialties: Accounting & Engineering. The manager is familiar with both arenas, but far from expert. The manager can identify hidden problem areas that have a structural and maintenance impact, but the manager has no real background to evaluate adequate replacement costs and remaining useful life. Many managers will call in individual contractors specializing in the various areas of need to get their professional opinion. Sometimes the opinion is free, sometimes for a small fee, but never without prejudice. The physical evaluation can be carried out to a measurable degree of effectiveness in this manner. Save thousands of dollars for the community. What are the liabilities? Just ask the property manager in Florida who was held personally responsible for bad guesses in his report. Ask the management company named in the lawsuit. Ask the board members of the community named in the lawsuit. The incident is not an isolated one. When new homeowners submit their mortgage applications, somebody has made a statement as to the adequacy of the reserves. If an unanticipated special assessment arises in the next 12 months, look for the lawyers to appear. You’d better have fulfilled your fiduciary responsibility.
The accounting facet of the reserve study seems simple enough. Take the replacement cost and divide it by the projected remaining life of the item. That gives you your annual contribution. Divide it by the number of homes in the community, then divide by 12 and that gives you your monthly contribution. Pretty simple. Interest will balance out inflation and call it a day. So why are there so many complex software packages out on the market? There’s more to it. Your first stop might be the “Do-it-yourself” package offered at a minimal price by Robert Nordlund, one of California’s oldest reserve study specialists. You may consider it adequate, maybe not. What you can count on is that for less than $200, it will open your eyes to the potential complexities of the process. You’ll gain an understanding of the theories and procedures. You may stop there and say that this is enough. You may go on to examine some of the more complex programs used by such companies as PRA and really get overwhelmed by all the bells and whistles possible. Either way, you have a responsibility to explore and a decision to make.
Understand what your fiduciary responsibility is and how to protect yourself and your community.