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Whats a Reserve Study?

By
Services for Real Estate Pros with Pacific Crest Reserves

In Washington, Condominium Associations members need to consider a Reserve Study. The reason behind this is that many association are trying to keep annual dues low at the cost of future expenses. Recently a 10 unit complex had to levy a special assessment of $50,000 per member to cover deferred maintenance. Most homeowners don't have this much cash available. A reserve study helps identify a costs and spreads the expenses over a great period of time.

The objective of a Reserve Study is to set the minimum level of annual reserve contributions made by a condominium association. This generally insures that adequate funds exist for the replacement or major repair of any component of the property as it becomes necessary. Depending on the Board of Director's wishes, a study can be either extremely exhaustive or restricted to only the major building components. In either case, each item included must be evaluated to determine the current condition, the remaining useful life, and the replacement cost. This information is then synthesized into a spread sheet format which determines the contribution needed. All costs and balances are shown both in constant dollars and adjusted for annual inflation and interest earned (rate assumptions are clearly shown). Ideally, an even level of contributions is established that maintains a positive balance in the account.

In order to build a study that is the greatest value to the Association, Reserve analysts, employs a "Reasonable Approach" when evaluating a property. This means that we attempt to predict (based on the economics and the Association's objectives) what a reasonable person will decide to have done when the corrective action becomes necessary. For example, a reasonable person does not have an entirely new fence installed when repairing and restoring the old one would have produced the same result. The benefit of this is that reserve contributions are minimized to allow for what is most likely to occur. Our studies are not based on a worst case scenario. It should be noted that our approach assumes that the Association will correct minor problems as they occur - before they become major problems.

 

Pacific Crest Reserves

Toll Free 1-866-618-7764 or Local 360-588-9956
http://www.PacCrestReserves.com

Comments (16)

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Keller Williams - Simpsonville, SC

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Aug 25, 2008 06:31 AM