Reserve Study Facts You Need to Know Before Funding One
Commercial property owners and home associations are mandated by law to conduct a reserve study annually to ensure the upkeep and value of the property. It is a budget-planning document that entails physical and financial analysis of funding requirements for future replacements and repairs of a property’s major components. Moreover, the study reduces the need to specially assess the property and its value come the time it will have to be marketed in the future.
Before seeking professional help from a reputable reserve study firm, there are facts you should know in order to be on the same page with the team. This will also help you attain closer expectations.
Reserve Study Facts You Need to Know Before Calling Your Reserve Study Specialists
Fact #1: Not all reserve study conductors are the same.
While anyone can perform a reserve study, it takes degree and expertise to be classified as a reserve study specialist. Specialists in the field are mostly professional engineers or degree holders in architecture or construction management. Without a doubt, these people have years of experience and expertise to come up with a relevant and more accurate study which is crucial for future use. This is what separates them from those who plan to do a reserve study on their own with only google and other tutorials as references.
A major portion of a reserve study will be done in light of each component of a property’s actual condition, e.g. roads, roofs. Thus, these areas must be assessed by a legit specialist, e.g. a professional engineer, who has gained extensive experience and knowledge after carrying out such kinds of evaluation.
Fact #2: You can have two reserve studies simultaneously done by separate entities and not get the same results. It is normal, nonetheless.
The classic format of reserve study entails a section where all of the property’s components, their calculated repair and replacement costs, and estimated remaining lives are stipulated in order to calculate the reserve fund for the next year. However, it had been observed that the formatting limited the reader’s focus on the next year’s funding, missing the other essential details. Because of this, the authority has come up with an improved national standard that will help property owners in planning long term decisions. In the new mandated format, there will be a physical assessment of the existing conditions of the property’s components, and there will be a comprehensive financial study covering a 20 to 30-year projection of reserve fund and an explanation as to how the figure was derived.
That being said, if you had two reserve studies done and they showed different results, it could be that the first one used the classic format while the second one used the latest form. Nonetheless, both studies will get your firm prepared for possible events in the future.
Fact #3: Full funding may equate to over funding.
The new standard mandated by law specifies four unique funding goals for a property owner to select from to facilitate reserve fund planning for the future. At the core, the funding enables the cash flow reaching $0 anytime in the projection period. This is where full funding is necessary. It is based on maintaining a 100% fund for each property component. Technically, this over-the-baseline funding may mean over funding especially when no event would necessitate its use for longer periods.
Fact #4: Accuracy of calculated replacement costs is vital.
This figure must be calculated with an excess of the property component’s exact replacement cost to ensure a sufficient fund in case the item where the original cost was based upon is not available or has phased out.
Fact #5: You can gain a lot from investing in a reserve study.
The cash flow analysis the reserve study comes up with will be used to help you plan on how to save for that calculated reserve fund. It will help you plan for actual replacements, facilitating an easier and smoother negotiation with potential contractors. But aside from that, the analysis will also keep you on track when it comes to how much funds should be stored and maintained for a certain period. This will help you establish an investment plan to have a maximized return based on what will likely be needed at the present and the months to come.
Also, the study covers replacements that will need to be catered for the succeeding years. With this, you can proactively plan in having it done before the estimated time of deterioration of the property’s components. You will be steps ahead and kept away from the possibility of having to spend more than the actual cost for acting late.
Fact #6: A reserve study is not for determining a property’s maintenance schedule.
Although a reserve study is best known to help property owners prepare for the upkeep of their asset, it is only for major replacement or repair of a property’s main components. It does not cover minor elements which means the budget for the ongoing property maintenance is not included in the reserve fund. It is something you should be saving up for too if you want to save and preserve your reserve fund.
Fact #7: Reserve studies are some kind of a financial statement for the most part.
A reserve study is done to facilitate proper and relevant budgeting for possible replacements and repairs. Nonetheless, you should give room for differences as the budget is again, just an estimate which means the actual cost may end up higher or lower.
Another factor that makes cost variation inevitable is the currency value, i.e. the study where the preparation and bidding were based on could have been made in light of a different dollar value. This is why a reserve study has to be updated yearly.
Reserve Study is, indeed, a great investment for your property!
While a reserve study can be done by anyone, the more unqualified the people to conduct it are, the more useless it will be. The analysis to be made is crucial, hence to best uphold your property’s value, it pays to entrust the job to the real experts. Think of it as an investment.
