Reasons For Doing A Reserve Study

by Latisha Flynn on Sunday, August 8th, 2010 | No Comments

When anyone who has been a member of a Homeowner Association Board knows that things will wear out and, unanticipated expenses will occur. In general, there is no way to predict the future. For this reason, it is important that any Homeowner’s Association do a reserve study which consists of a careful analysis and a prediction of future happenings.

People who are really on top of proper management use the reserve study to anticipate deterioration of physical assets and a method of replacement. It is the core of successful business operations. By establishing a fund, to which periodic contributions are made, it is possible to take care of these events without a heavy drain on the members’ cash flow.

Homeowner’s Associations are a very good example of a reserve study, although it is often used in the business world as well. When one purchases a home or condominium where such an association exists they must contribute a monthly payment to the association. This Association Board takes care of a fund which will be used for replacements or repairs in the neighborhood. In this manner, the home or condominium owner does not have to disturb their monthly cash flow with a huge expense when such an event occurs.

Businesses using this method find that the expenses to this reserve do not take a drain on the company’s cash flow when these things occur. This fund should be directed for this purpose only. Special emergencies often require a special assessment. This is a very sound business decision.

The secret to this type of operation is advance planning. By carefully determining which physical assets are going to deteriorate within a certain period of time as well as contemplating other necessary expenses it is simple to determine how much the payments into the special fund are going to be. This way, expenses that are anticipated will be taken care of.

A Homeowner’s Association, in particular, must do very careful advance planning. If this is not done when something such as deterioration of some physical assets occurs there is no recourse but to declare an emergency and special assessment. This is disastrous for those responsible and for the association itself.

Homeowner Association Board Members are considered the same as corporate officers of a large corporation. They have legal and moral obligations to plan for any repair or replacement needs for the common area and also to collect the necessary fees and maintain a fund for this purpose. Advance planning and a good budget will assure that the major assets will be properly maintained.

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