When anyone who has been a member of a Homeowner Association Board knows that things will wear out and, unanticipated expenses will occur. In general, there is no way to predict the future. For this reason, it is important that any Homeowner’s Association do a reserve study which consists of a careful analysis and a prediction of future happenings.
A reserve study is considered a special plan used by people in an organization who can anticipate and prepare for the necessary expenses. These expenses will be encountered in repairing and replacing necessary things in the common area or other operations connected with the association. It provides for the establishment of funds to take care of these occurrences in a timely manner. By putting money into this special allocation, it is simple matter to take care of these problems.
In the everyday world, one will often find these neighborhood Homeowner’s Associations. These associations have a Board that collects monthly fees from the homeowners. This money is put into a special reserve fund that takes care of any replacements or repairs needed in the common area. This relieves the homeowner the burden of a sudden huge payment out of pocket.
Whether a company or an organization such as the Homeowner’s Association, the secret to success of this operation is advance planning. Noting which physical assets are going to deteriorate or need to be repaired and adjusting the monthly fee to this amount will result in a successful operation. Estimating the life of such assets that a Board or company is responsible for is a major part of the plan.
An association or business must make advance planning in anticipation of things which naturally occur over time, such as deterioration. Not doing this will create a financial emergency, which, in the case of homeowners, would be a special assessment. If this occurs there cannot only be hardship on the people involved but also be disastrous to the association.
When using a special fund, to which contributions have been made, and which is created for the replacement and repair of physical assets, there is no necessity for special assessments when they occur. It should be understood by the members that when there are emergencies, not anticipated, there will be some kind of special assessment imposed. With this plan in place, one has covered all areas for anticipated needs.
There is a great responsibility on the Board members of an Association. They are corporate officers and, as such they not only have a legal responsibility but a moral one as well. Being aware, and planning for, the deterioration or needs of the common area, will allow the association assets to be maintained and result in secure budgets and congeniality relationship with the homeowners.
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