What is a Reserve Study?
A Reserve Study is an in-depth report that anticipates the future replacement cost and financial expenses for the community-owned property of condominium associations, homeowner associations, and apartment complexes.
Why is a Reserve Study recommended?
The association’s trustees need the expense information for both short-term and long-term (20 yr.) financial planning, as well as budget and assessment information year by year. A Reserve Study also serves as a valuable tool for assessing a community’s necessary Homeowners Association (HOA) fees, since the evaluation of HOA fees must take into consideration any anticipated future repairs and replacements within the community. A Reserve Study delivers the best estimate of these potential repairs so the association can determine the most profitable amount possible for HOA fees.
Is there a law requiring the completion of a Reserve Study?
Missouri does not have such a law presently. However, the Federal Housing
Administration (FHA) released new requirements demanding that all communities
place 10% of their yearly operating budget in a “replacement reserve account.”
Why should our community be concerned about FHA and lending requirements?
Failure to obtain lenders’ approval will limit the opportunities of the owners to buy,
sell, and refinance property. This could even result in foreclosure, loss of property,
and financial hardship. Remember, local banks and mortgage companies often
bundle millions of dollars’ worth of residential loan and sell it to a secondary lender
market—which relies on government guarantees. Therefore, the loans must meet
FHA requirements at that time.
What if my association does not have a study or will not contract for a study?
Failure to obtain a Reserve Study can result in one or more of the following:
• An individual assessment imposed on the association that some members may not only
find inconvenient, but difficult or impossible to pay.
• The inability to sell or refinance a home, since buyers and lenders are becoming more
knowledgeable and often refuse to purchase in communities that are not in compliance.
• An unfavorable reputation when members of an association become involved as
defendants in litigation.