What Is a Condominium Reserve Study?
Let’s talk about a condominium reserve study. In some states this is a requirement, but only a few mandate that a condominium association must complete one. So what exactly is a reserve study?
A reserve study is a financial planning tool used by condominium associations to anticipate long-term maintenance expenses. I live in a condominium building with 101 units. When our association creates the annual budget, we include costs like snow removal, landscaping, routine maintenance, management fees, and etc. These are the predictable, recurring expenses. But a reserve study goes further. It helps plan for major future repairs and replacements such as new roofs, repaving roads and driveways, or replacing shared HVAC systems.
How Does a Reserve Study Work?
A reserve study outlines how much money needs to be saved each year so the association is financially prepared when those major expenses arise. For instance, if we expect to replace the roof in ten years at a projected cost of $100,000, the reserve study adds inflation and determines how much the association needs to set aside annually. It does this not only for the roof but also for all other critical components of the property.
Most reserve studies look ahead 3 to 5 years in detail, which allows flexibility to adjust for rising costs or unexpected issues. Some associations do a light review annually. Others wait as long as 10 years, which often proves to be a mistake.
What Happens When There’s Poor Planning?
From a personal example, our association had two major unplanned expenses. One was a boiler replacement and the other was an environmental remediation. Both were poorly budgeted, and the result was a $7,000 special assessment per unit owner. This lump-sum payment was in addition to our regular dues and served as a wake-up call about the importance of proper planning.
Lender Requirements and the Impact of COVID
Lenders have caught on too. Many now require reserve study documentation before approving loans for condo buyers. They want to ensure that buyers will not be faced with huge unexpected assessments that could impact their ability to repay the mortgage.
During COVID, the importance of reserve studies became even more apparent. Construction and repair costs soared, sometimes by more than 100%. Many associations that had been saving according to pre-COVID estimates found themselves far short. As a result, dues increased dramatically and special assessments became common.
Why Low Condo Fees Aren’t Always a Good Thing
This is why I always caution buyers: do not be impressed by low condo fees. Sometimes a low fee means that the association is not putting enough into reserves. A low monthly fee may feel great now, but it could be a sign of an association that is not planning well for the future. That is a recipe for financial surprises.
What Should You Look For as a Buyer?
Instead, look for a realistic and well-supported budget. Ask for copies of financials, current and past reserve studies, and evidence that the association is contributing the appropriate amount each year. Make sure the reserve study has been updated within the last five years, and if not, ask what alternative planning tools the board is using.
Make an Informed Decision
Buying into a condominium means becoming part of a shared financial structure. Understanding the strength of that structure is as important as inspecting the unit itself. You can learn more about condominiums: The Truth About HOA Fees You Need To Know
Let’s Review Your Condo Documents Together
If you are thinking about buying a condo, it’s important to make sure you are not just falling in love with the unit itself but also understanding the financial health of the entire association. A well-done and current reserve study can save you from future headaches and surprise expenses. If you need help reviewing condo documents or want to make sure you’re making a smart move, I can put you in touch with a trusted real estate agent in your market. Just reach out and I’ll make the connection.
