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Community Association Reserve Study | A Fool And His Money

by Kara Cermak, CMCA®, AMS®, PCAM® on Jan 30, 2018 8:04:00 AM

We all know we need a commmunity association reserve study – well, we mostly do, right? However, do we utilize these reserve studies in the way that was intended? Are we USING these reserve studies to plan ahead, research and study possible scenarios?

Proverb - Wiktionary

- a fool and his money are soon parted

  1. It is easy to get money from foolish people.
  2. It is difficult or unlikely that foolish people maintain their hold on acquired wealth.

None of us wants to be considered foolish, and often, Boards err on the side of micro-managing to avoid looking foolish. So, let’s delve into the possible scenarios for looking foolish in your reserve spending, avoid the possibility of micro-management and develop a reputation for a community that thinks and plans ahead, and leaves homeowners with a sense of security. 

There is a process with reserve spending on large projects, and it involves due diligence on the front end and requires that there is a plan, in advance of large expenditures. Here are the steps to avoiding disaster: 

1. Go out to bid with a reserve professional, hire said reserve professional at least six months in advance of the budget season, preferably, and have a final draft of the reserve study for your budget preparation. 

What is so important in that study? Aside from the current and immediate future fiscal year’s required spending, it is important to look at the coming five years. What are major expenses happening within the next five years? If it involves anything that has to do with a change in the look of the community (lighting, siding, roofing, painting, shutters, etc.), you have several things to decide, which leads us to our next step… 

2. Depending on what the community is in need of, there could be one to two years of research involved with a major capital reserve expenditure. Where to even start? Start by asking questions. Even a survey of the Board members, management company, reserve professional and perhaps, the auditor, is a good idea. Gather the answers that each of you THINKS is the correct answer, and together you will develop the actual answer. Below is a list of things you need to start considering. This list is not exhaustive, but it will get you started. 

  • Does the capital expenditure involve something that could update the look of your community?
  • Does the community look need to be updated, to compete in the market?
  • Are there other products that may be considered in place of actual replacement with like products?
  • Is there a potential for upgrading the replacement of the products, that may offer the homeowners additional comfort in their home or their community?
  • Is there the possibility that an upgrade of a particular item may allow for increased security within the community?
  • Are there surrounding communities that have caught the participant’s eye, and if so, what about that community caught their eye?

 3. After asking questions of your professionals and those that live within your community, it is time to consider the process – who is going to be helping, how much will it cost, and what options exist?

  • Does the community have a committee that is prepared to offer help with research, specification development, and interviews?
  • If there is NOT a committee that can assist, is it time to spark some interest with a newsletter article that seeks out individuals that may have a background that includes any of the following – project management, design or decorating, architects, engineers, or anyone in construction? Finding individuals within the community that can assist, could help save the community money during the process.
  • Even if you do have a committee, do you need an architect or engineer to offer advice, create specifications and drawings, and assist in the bidding process? 

4. Whom do you need to hire?

  • In need of an architect or an engineer? Time to go out to bid at least one to two years in advance of the project, as finding an architectural or engineering firm that suits your needs will take several months. Then there will be a process of creating what you want in the community, which will take a couple of months. It is important to ask less obvious questions, as well, such as – how many communities of this size have you overseen, regarding replacement or redesign? Where are they located? What went well in that project? What didn’t go well? May we call your references?
  • Do you need a designer? Interview interior designers for the redesign of common area interiors. Find a designer that you agree that everyone likes, beliefs have the eye that is important, and that everyone will trust in the end. There are at least two things that will make even the calmest professionals act otherwise:
    • Tow their car
    • Ask for an opinion on decorating 

5. How much money do you need to get where you want to be?

Do you need a loan? Time to talk to local bankers that are very happy to tell you about the tons of products they have for community associations.

  • Do you need a special assessment? All special assessments are not bad. If you are improving something, it involves marketing the solution. Enlist professionals to do that.
  • Do you need a combination of the above, to achieve the desired result? Your professional team can assist you with this – your accountant, your community association manager, your banker, your attorney and perhaps, your reserve professional.
  • Do you need to merely increase reserve funding for the next couple of years so that you can achieve the desired results, and perhaps phase in the solution? Consider the other significant reserve expenditures during that period of time. Very important that you have money to handle all of your needs, not just some of your needs.

 Keep in mind that all of the above is being done before you have even started interviewing professionals that may end up doing this work. Remember that they may also have suggestions, so finding a trusted partner may bring about additional changes. 

Treat your community association as something fluid that can change with the times. If this process is employed correctly, the result will be a well-thought-out, a complete plan that could incorporate changes that will increase property values, including potential safety concerns and incorporate a better way of life for your community members. 

Final recommendation? Have fun! Honestly, this process should be exciting and fun, if considered early enough. Have town hall meetings to explain your plans. Write newsletter articles about your plans, well in advance. Informed membership means happy membership. Finally? Good luck!

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