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Published July 24, 2019
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
use of those funds can make or break an association. It is
essential to get a snapshot of whats 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 financial strength of the association, 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 financials 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 do exist. You can then compare your current operating and
reserve account funds to your what your reserve study states you
should have. The reality is that most association won't meet the
suggested capital contributions needed within the reserve study;
however, you do want to know if the difference isn't something that
is 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 those individuals that are wondering what a reserve study is, it
is a long-term capital budget planning tool which 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 first hand where a board
wants to upgrade the pool area because they promised the owner's
they would improve the look of the property, but at the same time
the cooling tower is in need of 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 in comparison to the information/knowledge you and your
board would gain. We strongly recommend our clients to obtain it; in
fact, we had a client that 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
it was time 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'm of
the opinion that 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.
I'd love to hear from our readers… how does your association know if
the money is being spent correctly? Do you have a Reserve Study?