An HOA reserve study is an essential tool in future financial planning. Without it, an association would have no way of knowing how much it needs to repair or replace major components when their estimated useful life runs out. Despite the importance of a reserve study, not all associations conduct one, especially since Texas law has no such requirement.
What is an HOA Reserve Study?
A homeowners association reserve study is a planning tool that determines how much a community needs to meet future financial needs.
It examines an association’s physical and financial components before developing a funding plan. This funding plan helps ensure the HOA has adequate reserves to cover the cost of future major repairs and replacements.
There are three types of reserve studies: a full study, an update with on-site inspection, and a financial update.
- A full reserve study is a comprehensive evaluation of the association’s physical and financial assets. It includes an on-site inspection and a comprehensive funding plan. This is a common option for HOAs that have never had a study or haven’t had one done in several years.
- An update with on-site inspection is less detailed than its full counterpart but more extensive than a simple financial update. To conduct this study, a specialist reexamines the HOA’s physical components, using new data to update the schedules and costs.
- A financial update is the least comprehensive, as it simply revisits the numbers. It doesn’t involve any physical inspection of the property. With this, the specialist adjusts the amounts based on inflation and old data.
What are the HOA Reserve Study Requirements in Texas?
In Texas, HOA reserve studies are not legally required. That said, board members should still check their governing documents. The CC&Rs and bylaws, in particular, may require the association to maintain a reserve fund and perform a reserve study every few years.
Even without such an obligation, it would be wise for HOA boards to conduct a study anyway. After all, reserve studies help associations determine how much they should have in reserves at any given time. This, in turn, protects the association from unanticipated expenses.
What is a Condo Reserve Study?
A reserve study for a condo association is the same as for an HOA. It includes an examination of an association’s physical and financial components as well as a funding plan.
Condominium associations are more in need of a reserve study than their single-family counterparts. This is because COAs typically share more elements, such as hallways, elevators, lobbies, plumbing systems, and electrical systems. They also share common walls, floors, and roofs. There’s a lot more to maintain in a condo than in a single-family neighborhood.
Is a COA Reserve Study Required in Texas?
No, Texas law does not require COAs to conduct a reserve study. That said, it does provide some guidance. Under Chapter 82 of the Texas Property Code, condo associations have the authority to maintain reserve budgets. If a COA maintains a reserve account, it must disclose the amount in resale certificates.
Beyond that, condo boards must also refer to their CC&Rs and bylaws. These documents may consist of reserve study requirements.
What Does a Reserve Study Include?
A standard reserve study consists of three parts: a physical analysis of the association’s components, a financial analysis of the association’s funds, and a funding plan.
- A physical analysis lists all of the association’s common elements, including roads, buildings, and fences. A specialist will then estimate the remaining useful life and replacement cost of each component based on an on-site inspection.
- A financial analysis evaluates the association’s current reserve fund balance and compares it with its projected financial needs. This determines if the association has enough money to cover the cost of future repairs or replacements.
- A funding plan determines how much the association needs to meet its financial obligations for the reserves. It offers a recommended contribution plan that lists how much an HOA would need to collect from homeowners each month or year to reach at least a 70% funding level.
The Importance of a Reserve Study
A reserve study may seem like just another financial requirement, but it’s more than that. It comes hand in hand with a reserve fund, allowing the board to calculate contributions and ensure long-term financial stability.
Without an HOA reserve study, the board would have no way to anticipate major repairs and replacement costs. The study arms the board with the right knowledge to prevent unexpected large bills for homeowners. It supports reserve planning and homeowner stability by spreading costs over time rather than all at once.
The same argument extends to special assessments. If an HOA fails to plan for the future and a large expense arises, it would be forced to levy significant special assessments to cover the cost. Other options include a loan and a sharp increase in HOA dues.
All of these can also contribute to property values. When the HOA maintains its common areas properly and makes sound financial decisions, it can attract more buyers and protect homeowner investments.
Board members have a fiduciary duty to manage the association’s assets. By planning for future financial needs, an HOA board can fulfill its duty and keep homeowners happy at the same time.
How Often Should an HOA Perform a Reserve Study?
The frequency of a reserve study depends on two things: state laws and the association’s governing documents. Some states explicitly require a full reserve study every three to five years, with annual reviews to update costs and fund balances.
In Texas, there is no statutory requirement regarding how often an HOA should perform a reserve study. Board members should check their CC&Rs and bylaws for guidance. In the absence of such provisions, it is best to follow the three-to-five-year recommendation.
How Much Does an HOA Reserve Study Cost?
The cost of a reserve study depends on several factors, including the type of study, the association’s size and age, and the complexity of its amenities. The larger, older, and more complex the association, the higher the price.
Financial-only updates can cost between $250 and $1,000, whereas updates with on-site inspections can cost between $1,000 $3,000. For a full reserve study, associations should expect to pay somewhere between $2,000 and $10,000 or more.
For the HOA’s Future
It is clear that an HOA reserve study plays a critical role in a community’s financial stability. While Texas law does not require it, associations would still be smart to hire a professional to perform one anyway. This helps ensure that the HOA’s reserves are well-equipped to handle future financial needs.
Graham Management offers exceptional HOA financial management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more!
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