The Partners’ Corner – HOA Reserve Study
Each month, we will feature one or two questions submitted by our board members, residents and employees that will be answered by a KWPMC subject-matter expert. If you have a question, please submit your questions to firstname.lastname@example.org.
Q: Dear Paul: Our Condominium is at the point where we really need to discuss doing an HOA reserve study. Some of our board members feel that we can undertake this project, over time, on our own. What are your thoughts on why we should consider hiring an outside company or person to help us? – Bob A., Miami, Florida
A: Dear Bob: Thanks for reaching out. These days I am finding that most reserve studies are prepared by professionals with backgrounds such as engineering, architecture, construction management, and other related fields who provide insights about the various physical components that make up a property. These individuals have ongoing training and experience because they work with a wide variety of unique communities continuously. They enjoy the benefit of an aggregate wealth of knowledge that can be leveraged across their clients. Really, it’s the same reasoning behind why a board hires a management company instead of self-managing a property – it provides you with access to a wider range of resources, best practices, safety nets and information. As you alluded to, some of your fellow board members have questioned why an association board or a management company couldn’t just do everything involved with a reserve study by themselves. It’s a fair question, and there are certainly cases where association board members have done a great job in managing their reserve planning for many years at a time with no major setbacks. Yet, there are still many good reasons, I would argue, for your community to use a professional.
For starters, engaging a professional reserve study provider is much like working with a CPA for managing association finances, or hiring an attorney for legal advice, in that it results in educated and unbiased guidance from a third party that has no interest in the community except for providing reliable information. Using an outside professional removes any conflict of interest (whether perceived or real) that may exist when board members are compiling this information for themselves. Because board members are also residents of the association, they are subject to the financial outcomes that will result from reserve budgeting. Unfortunately, this can sometimes lead to a temptation to “fudge the numbers” to help keep assessments low, masking the reality of the financial situation.
Even if we assume that all board members are acting with the best of intentions, there are still some serious potential pitfalls that can develop. Usually, this manifests in some form of “not knowing what you don’t know.” The only way to create a reliable reserve plan is to create an accurate component list. Having worked with thousands of association clients over the years, we’ve seen a wide range of reserve schedules prepared by boards of directors containing significant flaws, effectively dooming any conclusions made from those schedules to be inaccurate and misleading.
Therefore, I would recommend that at the very least, you go through the process of formally considering hiring a third-party provider or company by obtaining some proposals and having your board sit through meetings and presentations with the providers. This way, you can conduct a true cost-benefit analysis based on the facts and with a deeper basis of knowledge and you can have an intellectual discourse with your board and residents that will result in the right decision for your community.