Reasons For Doing A Reserve Study

Posted on August 4, 2010
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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.

Having a reserve fund in place relieves a Homeowners Association of having to invoke special assessments when necessary repairs or replacements have to be made. This eliminates any drain on the association’s fund and still allows all areas and other things to be kept in tip top condition. For true emergencies, a special assessment should be made and this fund not touched.

Any association or company that is responsible for keeping things running smoothly must use advance planning. With advance planning it should be known what the physical assets are and have an estimate of their life expectancy. By careful research this information is readily at hand which makes it fairly easy to make a close calculation of how much money is going to be needed at a special time.

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.

As Board members of an association the members are considered corporate officers who are responsible for planning a realistic budget, maintaining a fund for this purpose, and collecting the proper fees. They are not only legally responsible but morally responsible as well. It is absolutely essential that people in this position are aware of the requirements of the job and have the ability to carry them out.

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