How Far Ahead Should The HOA Reserve Study Cover?

Some people think that homeowners associations can be a financial burden and they have probably voiced their thoughts on the neighborhood website, especially when the reserve funds are used.  Reserve studies are usually not complicated but there may be times when residents question how they are used.

Though, they can cause confusion, particularly when it comes to determining the number of years they should cover.  Your neighborhood website won’t provide an answer to that issue because HOA communities vary and what works for one HOA could lead to problems for another.

 

A reserve fund is money set aside to meet the costs of maintaining, repairing, and replacing various items in a community.  The capital assets of any given community have a limited shelf life, such as pools and roads.  An HOA can take preventative steps to reduce the rate of wear on these assets.  This is called proactive maintenance and it’s covered by the operating budget.

In other words, when an asset stops functioning, you may use the reserve funds to cover the expenses associated with the replacement, repair, and maintenance.  A reserve study is done by an analyst who tries to determine the projected costs of major maintenance in a community over a given period of time.  Reserve studies prioritize capital assets as these are owned by the HOA.

 

Major assets like vehicles and recreational centers that have a long life of being useful tend to result in reserve studies that extend forward for longer durations.  The opposite is true for smaller communities whose capital assets have short useful lives.  National standards encourage associations to project up to 20 years forward, which is the minimum.

Some HOA’s have a tendency to extend the useful life of their assets to keep their reserve funds lower.  But, that only creates potential financial issues in the future.  Instead, make honest projections and analyses to ensure you have a reserve fund that adequately serves the community.