Association boards must invest in HOA reserve studies. These studies help the board determine how much it needs to collect from homeowners in reserve contributions. Yet, reserve studies can be confusing, especially to the untrained eye.
What are HOA Reserve Studies?
A reserve study is a long-term financial and physical planning report for an association’s major shared components. Also known as an HOA reserve analysis, this report helps prevent surprise expenses and ensures fair funding contributions from owners.
The reserve fund funds future major repairs and replacements of capital components. It essentially acts as a savings account, protecting the association from financial strain. That said, most HOAs don’t know how much their reserves should contain. The reserve study answers that.
With a reserve study, boards can determine which parts of the community will eventually wear out and require repairs or replacements. This study also figures out how long each component will last and how much it will cost to repair or replace them. From there, the study develops a funding plan.
HOA Reserve Study Requirements in Maryland
In Maryland, both HOAs and condominiums must prepare reserve studies. Section 11B-112.3 of the Maryland Homeowners Association Act states that an HOA must have a reserve study if it:
- Maintains common areas, and
- Has at least $10,000 in total repair or replacement responsibilities.
Section 11-109.4 of the Maryland Condominium Act mandates that condo associations conduct a reserve study. That said, the condo law does not contain that $10,000 threshold.
What Does a Homeowners Association Reserve Study Include?
A typical reserve study includes three parts: the physical analysis, the financial analysis, and the funding plan. Let’s discuss these below.
Physical Analysis
The physical analysis is essentially an evaluation of the association’s major components or shared elements. It involves a site inspection, usually conducted by an engineer, to determine how much remaining useful life each item has.
For example, if a roof has 15 years of remaining useful life, by the end of those 15 years, the association must have the funds to replace or repair it. This is where the financial analysis comes in.
Financial Analysis
The financial analysis examines the HOA or condo’s current reserve level. It estimates the cost of repairing or replacing each item once it reaches the end of its useful life.
Funding Plan
After analyzing the association’s physical and financial assets, the reserve specialist will then prepare a funding plan. This plan estimates how much the board must save yearly to meet future needs. It essentially determines the necessary annual contribution to the reserve fund to keep it properly funded.
The funding plan must prioritize essential repairs that affect the following:
- Health and safety
- Structural integrity
- Plumbing
- Electrical systems
- Heating and cooling
- Other critical infrastructure
Types of HOA Reserve Studies
There are three types of reserve studies: a full study, an update with a site visit, and an update without a site visit. The needs and requirements of an association will determine which type of study it must perform.
1. Full Study
A full reserve study includes a comprehensive on-site inspection and a financial analysis. Most associations go for a full study if it is their initial one or if several years have passed without an update. Due to the extensive nature of this study, it is the most expensive.
2. Update With Site Visit
This study involves a site inspection, but it isn’t as comprehensive as a full study. Most associations conduct this update roughly every 3 years to verify conditions.
3. Update With No Site Visit
Also known as a financial update, this study focuses solely on the association’s finances. It updates financial needs and funding contributions based on previous data. Because it doesn’t come with an on-site inspection, it is the most affordable option.
Who Must Prepare HOA Reserve Studies?
Maryland law requires associations to hire someone qualified to conduct reserve studies. This person must have significant experience in preparing a reserve study or working for a reserve study firm. Alternatively, they must be a licensed architect or engineer or hold a professional reserve specialist designation.
Board members must never take it upon themselves to conduct HOA reserve studies unless they meet the qualifications above. This way, they can ensure the accuracy of the study’s findings.
How Often Should an HOA Do a Reserve Study?
In Maryland, developers are not required to prepare a reserve study while the association is under declarant control. That said, shortly before the developer turnover, the initial reserve study must be completed. After that, the association must update the study every 5 years.
This rule applies to both HOAs and condominiums under Section 11B-112.3 and Section 11-109.4.
Do Boards Need to Share HOA Reserve Studies With Homeowners?
Yes, board members must disclose the reserve study’s findings to homeowners, including prospective buyers. The board must make this study available to owners upon request.
Additionally, the board must include a summary of the reserves with the proposed annual budget. This way, homeowners can compare both financial reports. The proposed budget must incorporate the funding plan (i.e., reserve contributions) presented in the study.
How Much Does a Reserve Study Cost?
The cost of HOA reserve studies heavily relies on the size, complexity, and location of the association. Smaller communities with fewer shared elements may pay on the lower end. Meanwhile, larger associations with more extensive common elements often pay higher fees for more detailed studies.
In general, association boards should expect to pay somewhere between $500 and $10,000. The type of study can also influence the cost of an HOA reserve study.
A full study tends to be more expensive than an update with a site visit, even though both options include on-site inspections. On the other hand, a simple financial update without a site visit is the cheapest option out of the bunch.
Seeking Professional Assistance
Navigating HOA reserve studies can pose certain challenges, especially for volunteer boards. Most don’t even know the first thing about properly conducting a reserve study. Fortunately, by hiring professionals, board members can benefit from expert advice and experienced insights.
Majerle Management, Inc. provides management services to HOAs and condo associations in Maryland. Call us today at (301) 220-1850 or contact us online to get started!
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