SO WHERE DO WE STAND NOW IN REGARDS TO RESERVES ? by Rafael Aquino

SO WHERE DO WE STAND NOW IN REGARDS TO RESERVES ?

by Rafael Aquino

The use of associations funds is one of the most critical roles a board of directors manages on behalf of its members. Many times the benefit of those funds can make or break an association. It is essential to get a snapshot of what’s going on with the association’s funds before the purchase of your unit and even more so after your purchase. While it may seem challenging to know what is going on before your purchase, the reality is that you can get an idea by reviewing the financials and checking to see the association has a reserve study on file.

Not enough homework is done early on by potential buyers, or their agents, to determine the association’s financial strength, and they assume that all is well. That assumption can cost thousands of dollars if made incorrectly. How can you avoid it? The first step would be to dig into the financial statements; within those statements, you’ll know much money your association has in its operating account and reserve account (if it exists.) Second, you can review the Income/Expense (also known as a P&L) to determine if significant variances exist. If they do, you will need to find out why they exist. You can then compare your current operating and reserve account funds to what your reserve study states you should have. The reality is that most associations won’t meet the suggested capital contributions needed within the reserve study; however, you do want to know if the difference isn’t outrageous. If it is, you may decide not to purchase in that building, or if you’re a current owner, it may be time to sell. Remember, it’s not if it will happen, but when it will happen.

For individuals wondering what a reserve study is, it is a long-term capital budget planning tool that helps the board of directors and management identify both the physical analysis (useful life) and the financial analysis of the components in the common areas. This tool will allow your board to plan appropriately, project its future projects, and determine when and how the money they do have should be spent. I’ve seen it firsthand where a board wants to upgrade the pool area because they promised the owners they would improve the look of the property, but at the same time the cooling tower needs a significant overhaul. As odd as it may seem for most, this decision is simple; however, that is only true based on the leaders (board) you have appointed.

While many communities don’t have reserves, this should not stop you from obtaining a reserve study. The cost to get a reserve study is minimal compared to the information/knowledge you and your board would gain. We strongly recommend our clients obtain it; in fact, we had a client who listened to our suggestion and purchased a reserve study a few months before the budget season. Once they received the study, they quickly realized that it was time to start putting real plans in place. A few months later, that board decided to begin funding the reserves.

For those potential buyers looking to purchase in an association, make sure you do your homeowner. For those owners that already own in an association, make sure to ask your board members if they have a reserve study on file and if not to consider getting one. I believe it’s better to know what will potentially come so the proper steps and plans can be taken to either correct and/or communicate it to your membership.

As the Co-Founder and CEO of Affinity Management Services, Rafael P. Aquino leads his team to redefine excellence. They serve community   associations   efficiently