This regularly-scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Enjoy!
Question: How often should a condo building conduct a Reserve Study?
Answer: In my opinion, the Reserve Study is the most important planning tool for Condo Associations because it provides a roadmap for how much money needs to be saved and what projects the Board should prioritize.
What is a Reserve Study?
A Reserve Study should be done by an engineer who specializes in condo or apartment buildings. The engineer inspects all of the common elements like the roof, garage, hallway carpeting, pool, etc to determine the remaining useful life and major repair schedules for all common systems/elements. For buildings around here, the cost usually starts around a couple thousand dollars and goes up from there.
After the inspection is complete, the engineer provides a report that generally includes:
- Summary of the common systems
- Maintenance or repair recommendations
- Replacement schedule over the next 30 years
- Estimated annual cost of repairs and replacement needs over the next 30 years
- Analysis of the Association’s current reserve balance, annual reserve contribution amounts, and projected annual costs to determine if the current balance and contributions are enough to support costs over the next 30 years
How Often Should a Study Be Done?
Virginia Code states that a new Reserve Study should be done at least once every five years. This will still be the case when the new code becomes effective on October 1, 2019.
The Reserve Study is important for many people including owners, Board members, management and buyers.
- The financial analysis is critical for the Treasurer to determine monthly fees and reserve contribution levels.
- The repair schedule allows the Board to set priorities for themselves and management to solicit bids for major repair or replacement projects.
- Homeowners must provide a copy of the Reserve Study and current reserve account balance to buyers once they go under contract. Buyers have the right to cancel a contract within three days of receiving this information so having an updated Study and sufficient reserve funds is important.
- Buyers should carefully review the Reserve Study and compare the recommended reserve balance and contribution levels with the current balance and current-year contributions in the budget.
Funding Depleted Reserves
After completing a new Reserve Study, you may find out there are insufficient reserve funds and contribution levels. Boards generally have two options — increase condo fees or issue a special assessment.
If the reserve deficiency is 5+ years out or relatively small, there’s likely enough time to slowly increase fees until you’re caught up. However, increasing fees by too much can have a negative impact on sale prices, so sometimes a one-time special assessment is in the best interest of the owners. A special assessment may also be your best option if the money is needed quickly to cover reserve costs in the next few years.
Not only does Virginia Code request Associations to complete a Reserve Study at least once every five years, it’s good practice for all stakeholders to have an update Study available for better financial planning and facility management.
If you’d like a question answered in my weekly column or to set-up an in-person meeting to discuss local real estate, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at www.EliResidential.com. Call me directly at (703) 539-2529.
Eli Tucker is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, (202) 518-8781.