Is A Reserve Study is a Waste of Money?

Recently I was discussing the prospects of our services with a Board member who stated he was dealing with other Board members who felt like it was a waste of money to obtain a reserve study. He had taken a class about property management and one of the topics was reserve studies so he felt differently but he still had to get an approval from the Board before proceeding. The big question for me was why the other members felt like it was a waste of money?

Do they Known What a Reserve Study Is?

This is the most obvious questions but is often the most prevalent in the Pacific Northwest where many Boards members are unsure of what a reserve study actually is. Often I am presented with the idea that a reserve study is a building inspection, engineers report, valuation or some sort of accounting document. In actuality it is none of those – A reserve study is a budgeting tool. More precisely a report which provides a list of components, costs, projects and recommendations for adequately budgeting for replacement and repair expenses to common areas in a common interest community.

So the questions then becomes are these items important to a community? Well a community which has no knowledge of the common areas, costs or schedule of projects is in no way prepared to budget for them. Ignoring them has no impact on the expenses from actually occurring and waiting for the expenses to occur without budgeting for them is more expense, leads to special assessments, deferred maintenance and loans. All of which negatively impact a community’s market appeal and values.

Head in the Sand Approach

After some discussion with this Board member it was discovered that none of the other Board members had any experience with constructions costs, useful lives of components, property management, etc. They were against the reserve study strictly for the relative small expense of the study and evidently to keep the Board from fully understanding the extent of the liabilities of the community. These other Board members wanted to remain with their heads in the sand and ignore the significant expenses related to the common areas – this is very common and is one of the main reasons most communities are severely underfunded. Upon further discussion I found out this community had no reserve account established even though they had significant expenses related to the roads, a park, landscaping and a retention pond.

Be Wary of Bad Advice

In this case several of the Board members had been on the Board for many years and felt like they had a handle on the expenses. This had proved to be inaccurate as the roads in this community had begun to see significant deterioration and were in need of an overlay. This one expenses (over $50,000) was not taken into account by prior Board members and it was reported that some had been saying they felt the city would come in and pay for it when the time came. Well that proved to be anything but true, furthermore it was spelled out right in their governing documents that the roads were private and the Association’s responsibility. Either the past Boards had not actually read their governing documents (common occurrence) or they chose to ignore it with some sort of wishful thinking. Bad advice? You bet, and advice that will unfairly punish the current and future members badly. Unfortunately when someone has been giving bad advice for years they rarely change their mind and admit it; these other Board members who had made numerous bad decisions to “save money” were continuing to make bad decisions by not establishing a reserve account, not providing disclosure to the community and determining that a reserve study was a waste of money. In fact these other Board members weren’t even following the basic laws in Washington State for common interest communities.

Reserve Study Professionals are Independent

One of the greatest strength of a reserve study professional is their independence. The reserve study conclusions and recommendations are not based on third part interests. Boards, property managers, vendors, community membership, lenders, etc. all have an interest in the reserve study outcome. What the reserve analyst will do is be independent and unbiased in their research and recommendations in the reserve study. If a community is well funded the reserve study will show this but if the community has no reserve account established or has a high risk for special assessments then it will also show this and indicate the amount in shortfall. While a Board or Property Manager may have an interest in sugar coating the outcome of a reserve study there is no reason a reserve study professional will do this and in fact doing so would place liability on the reserve study provider.

A reserve study professional truly has an Associations’ best interest in mind and in doing so will be honest and open about the results of the study. Since most communities have a serious shortfall projected in their future this often means it is tough advice to give. Sometimes the truth is hard to swallow but it is the first step in following a path which is financially stable and responsible to the community membership.

The Outcome

The final outcome of the above conversation was a reserve study completed for the community and the realization that they were severely underfunded, were not following any statutory requirements with respect to a reserve account & disclosures, were not following their own governing documents and a community membership which was left scratching their heads wondering how they got to this point – All the result of poor decisions by past Boards and bad advice by those pretending they had done their research. But now that they know they can choose better options for the future and reduce the likelihood that this will come up again. With the continued help of a reserve study provider future Boards can ensure that bad advice from those not in the know can be prevented and is one of the main benefits of having a reserve study completed and updated. 

Additional Resources:  Minimize Reserve Account Contributions​  /  Follow the Governing Documents​  /  Reserve Study for an HOA