Robert Nordlund: 0:00

Money is tight everywhere, and your opponent is mother nature and Father Time. And you just have to appreciate that they are running your association down. We're not the bad guys. Legislators are not the bad guys. Governing documents are not the bad guys. A conservative board is not the bad guys. That's not you. You're not the bad guys if you're asking for a reserve study, if we're asking to increase the assessments, your insurance company is not the bad guy for saying, Do you have a reserve study, and are you funding for it?

Announcer: 0:32

Hoa Insights is brought to you by five companies that care about board members, association insights and marketplace, Association, reserves, community financials, Kevin Davis Insurance Services, and the inspectors of election. You'll find links to their website and social media in the show notes.

Robert Nordlund: 0:48

Welcome back to HOA Insights, common sense for common areas. I'm Robert Nordlund, and I'm here today for episode number 152 on my own. So we'll call this episode Robert On Reserves. We've been careful to not overload you with reserve study information that I of course find absolutely fascinating, but we've had enough questions that it's time for an episode dedicated to reserve study issues. Specifically, what do you learn from your reserve study? What does it tell you about how your association is doing, and how does it help you make better decisions? But before I dive into that content, I hope you enjoyed last week's episode with board hero Hal Hovey he reminded us that training is everywhere, even in podcasts like this one, free training is everywhere. Money is always tight, and communication is an important tool that most Association boards underutilized, keep the owners informed and minimize problems, keep them from spreading and minimize suspicions due to the rumor mill. So be transparent. If you missed that episode or any other prior episode, you can find them all on our podcast website, hoainsights.org on your favorite podcast platform, or you can search for HOA insights on YouTube, but better yet, subscribe to the podcast on our YouTube channel in order to get every episode delivered right to your phone or mobile device. Now, almost half of our audience stumbles on to the podcast based on a search, so subscribing not only gives you regular reminders when we drop a new episode, which is, I think, as you know, once a week, but more subscribers increases our ranking in podcast search engines, and that helps even more searchers find us. So we can help them lead their associations effectively. Well, those of you watching on YouTube, can see my favorite HOA insights mug here, talking about deferred maintenance at associations. I got that from our merch store, which can browse through from our hoainsights.org website or today's show notes. You find we have plenty of these items available for sale. We also have some great free items, like board member zoom backgrounds. So take a moment after the show, see what we have for you in the merch store, and at least pick up one of our free items before your next board meeting. Well, we enjoy hearing from you, and most episodes are indeed in response to a topic that you've recommended. So stay in contact letting us know what questions you have or topics that you'd like to hear more about. So leave us a voicemail at 805-203-3130, leave a comment on our YouTube channel or send us an email at podcast@hoainsights.org and like I said, earlier Today's episode is meant to catch up on a backlog of reserve study questions that our audience has asked. And they are questions

like: 3:49

"How much does a reserve study cost? How long is a reserve study good for? How can you expect me to trust your estimates for things 20 or 30 years into the future? and what value to me is it if we already know we can't afford to increase our assessments?" Well, these are some good, challenging starting questions, and I'll start with those first before I get into some material that I want to share with you, material that I think, I believe, will give you an edge in planning for the inevitable projects facing your association. So start with that first question. How much does the reserve study cost? Well, we just finished our 100,000th reserve study Fall of 2025. we are diving into that data to learn what we found out about different things. And one of those answers is, how much does a reserve study cost? The answer is, it's on average over the last six years at least, We thought that was a nice capsule point in time, in the last six years, The average reserve study was 0.8% of an Association's annual budget, so a little bit less than 1%. we have spoken in the past, Our target is to keep it under 1% and it was nice to see the data support us. So a reserve study, no matter what we do, full update with site visit, Update no site visit, the three types of reserve studies, They all are, Put them all together, they're averaging a little less than 1% 0.8%. How long is a reserve study good for? Well, we talk about reserve study is based on moving information. every year, the costs of the things at your association are changing, the conditions of the things that your association are changing, and the cash in reserves changes - costs, conditions and cash, all those three things are changing. So we're talking about budgeting when all the information is moving around. So we prepare a reserve study with the expectation that it's going to have, going to give wise counsel for one year, for the year that you prepare us to do the reserve study for national reserve study standards talk about best practice is to have a reserve study update with site visit at least every third year. So that kind of gives you a national perspective, if you think backwards in time, three years ago, we had some pretty darn high inflation. So if your reserve study is older than three years, you're getting into some costs that are way low, inappropriately low. We had to Jack a lot of costs up significantly faster than we would like, honestly, but that's just the nature of it. So a with site visit update every third year is best practice across the country. I gotta say, in some states, they don't have any legislation on reserves. In some states, they say you need to update a reserve study on a with site visit basis at least every third year. Some states say, update it on a with site visit basis at least every fifth year. And I can tell you that what we learn is that now I should have had this ready. I think it's 65% of our clients hire us every year. So that's just what we do. We are the reserve planning partner for our clients. They hire us primarily for a with site visit update every third year and a very inexpensive update no site visit in the two years in between, and that's so we keep their budget tuned. And I can tell you that the tell you two things, the reserve states that we update every year end up being just a revision, just a tweak. The reserve studies that we update every third year. We call those a revision, because there's a number of things that need to change. There's been storms. There has been accelerated deterioration. There's been some things that lasted longer than we expected. There's some costs that accelerated, some costs that were remained flat. But every third year, there's a lot that needs to change. Yet when it's every fifth year, we talk about those as rescues, they are so far off that it's almost like starting over their reserve funding is not tracking with what is currently necessary. So those are just a couple insights. The other thing I wanted to add on that is that when we track what's happening with our clients. When we look at our data, there's measurably fewer special assessments among the associations that we update annually. There's more assessments in the associations we update every third year, and even more, higher percentage of special assessments in the Reserve says that we do every fifth year. That tends to put some numbers to what our project managers feel when they're updating them. So there's measurable benefit to your association if you don't want special assessments, if you want to know, what's it take to keep our association budgeting safely and successfully for the future. Regular update reserve studies, not only get them, but follow them, and the numbers are significant for supporting that that opinion. Okay. Number three, how can you expect me to trust your estimates for things 20 or 30 years into the future. And that's a great question, honestly. And I've had some insurance agents, some and some insurance professionals ask me about that. They're like, Robert, we're just insuring for this year. How can you make an estimate for a. Roof that's going to fail 17 years into the future. How can you do that? And I answer with a grin. I guess it's a so commonly, do we don't. All we do in a reserve study is identify what's there now, and we have enough experience to know that a roof, for instance, typically lasts about 20 years, depending on the type of roof, depending on the environment, it will last 15 to 25 some roofs may last 30 years. But you know, it's in that range. And we know if it's new, it's got a lot of life left, and we can see the Telltales. We can see when it looks old. And so add that with some information we can get from our satellite tools. The information we get by asking you, when's the last time you replaced your roof, or is it original? We can pretty much triangulate on how old the roof is, and therefore how much life it should have left. And then, of course, you update that reserve study annually, or every third year. So we get a new opportunity that thing that was far away. We get an opportunity to see that in three years come closer. How are we doing another three years come closer. How are we doing another three years? So we're not making any guesses about things far into the future. We're making findings and recommendations for this year and the most that well after that first year, it starts to drift and get out of being current. But the most we expect a reserve study to stand or for anyone to call it reliable, even Fannie Mae, Freddie Mac an insurance company, anything like that. If it's older than two years. It's time to start updating your reserve. Say, so already. Already talked about that. How long is a reserve? Say, good for the question about, How can we make estimates for things this far distant into the future? Again, we don't we look at things the way they are now. We can determine their condition based on how many reserves days we do. We have a good sense of what our clients are actually paying in your region for a roof painting asphalt. Help you know what's responsible planning at this point in time. And then for you to retain or reserve, say professional at least every third year, to do an on site visit update at your property, to get a new baseline, a new benchmark, at what things are looking like, how things are changing. If your trees are now overgrown and now hitting the roof and damaging the roof, there's so many different things that start to happen at an association. We want to stay current with what's happening at your association so you don't get surprised by the things that should not be surprising, the things that deteriorate in plain sight or on schedule, right? According to their design lives. Okay, Number four, what value to me... How are we doing on time? Okay, I lose track of time when I'm doing this kind of stuff. So I'll get to the first four. What value to me is it, a reserve study I'm guessing, Why should we pay to get a reserve study if we already know we can't afford to increase our assessments? and that's a legitimate question. We know a few things. We know that deterioration is part of life here on planet Earth. We know that mother nature and Father Time are vicious opponents to anything that is built. Okay, they're formidable opponents. We also know that because of that, owning and maintaining real estate is expensive. We also know that every association is nonprofit, and therefore money is tight. I have yet to meet an association that is not extremely careful with their money. So we'll just leave that as a definition, that money is tight everywhere, and your opponent is mother nature and Father Time, and you just have to appreciate that they are running your association down. We're not the bad guys. Legislators are not the bad guys. Governing documents are not the bad guys. A conservative board is not the bad guys. That's not you. You're not the bad guys. If you're asking for a reserve study, if we're asking to increase the assessments, your insurance company is not the bad guy for saying, Do you have a reserve study and are you Funding per it did I say Fannie Mae and Freddie Mac they want to know that you are setting aside funds towards reserves, at least if you're a condominium association. My answer to that is, on one hand, it's not my problem. My job is to provide you with insights, I can tell you, and others in my profession can tell you what's around the corner. You may not be able to see it, but a reserve say provider can see it. It's what we do all the time, all through the year. Your doctor can help you diagnose why your elbow is sore. Your optometrist can diagnose why you're having a hard time reading well, you need new prescription of glasses. We're in the reserve study business to help you see the future and be able to get prepared for it. So my answer to that is, why get it Well, number one, reserve planning does not affect the cost of home ownership. Okay? Reserve planning is driven by mother nature and Father Time. They're the ones ruining your roof. Without Mother Nature and Father Time, your roof would last, I don't know. Long time, forever, and you as the board, are responsible for your governing documents, to provide for the needs of the association, to budget for your association. That's in every set of governing documents. And the bottom line is, the roof will fail. And it really doesn't care if you have set aside funds or not, if you have a reserve study or not, it will fail on or about again, I'm picking on roofs today, on or about 20 years. And so you and your homeowners will pay for it, either with ongoing funding, budgeted funding, or as a special assessment. You'll still pay for the roof. So if you say you can't raise your assessments because you can't afford it, well, obviously, then you can afford a special assessment, because the costs are the costs. There's some nuance to that. The nuance is that if you pay through budgeted assessments, then your money is in the bank earning, today, hopefully about 4% interest, and that's compounding. And so if you have 100 unit Association and you're funding reserves, it's almost like having 104 people funding reserves, because the bank is paying 4% on everything and it's compounding. That's just absolutely fantastic. So if you care about saving your homeowners money. The way to do that is by funding reserves on an ongoing basis and getting your friendly bank to kick in 4% along the way. Otherwise, the roof will leak and you'll have to say, Oh no, we need a special assessment. You're wringing your hands like I am, and if it's a $500,000 roof project, you'll need a$500,000 special assessment. Now, if you say, well, we'll get a loan, then I say, Well, fine. But again, that doesn't change the nature that everything is deteriorating. And now, instead of getting money from the bank in terms of interest. Now you're paying the bank interest, and I think that ends up I should have come prepared with this. I tend to wander. That ends up making a project I believe, about 20% more expensive to your homeowners because of the compounding effect of getting interest from the bank versus paying interest to the bank. So if indeed you are really concerned about saving money for your homeowners, you need to face the truth of the matter and say, Hey, there's nothing we can do about the roof failing, the paint getting dry, the asphalt deteriorating, the carpet getting stepped on and worn on, etc, etc, etc, everything that's at your association. So those are the costs, and you're the board. You're responsible to budget for it. If you fail at that job, you will budget for it via a special assessment. I wish it was different or simpler than that, but those are answers to the first four questions. I look at the clock. I'm burning a lot of time here, so let me take a quick break and say that it's time to hear from one of our generous sponsors, after which we'll hear more reserve say tips and tricks that will help you communicate to your homeowners and set your association up for success. Are you

Paige Daniels: 19:48

part of a homeowners association or condominium board? Making the right financial decisions for your community's future is crucial at Association reserves, we're proud to serve communities nationwide. Specializing in reserve studies tailored to your community's unique needs. Our expert team helps you accurately assess your property's assets, forecast future expenses and develop a solid funding plan, whether you're a small HOA or a large condominium association, we've got you covered. Visit reserve study.com to learn more and get a proposal for your association, and we're back.

Robert Nordlund: 20:20

Well, thank you for helping being hanging with me as I was talking through the first four questions. Let me get to a little what I might call curriculum that can leave you with some of the foundations of the reserve study industry. I talked about deterioration. It's driven by mother nature and Father Time. Also, deterioration happens gradually, one day at a time. And so that's that concept of as things gradually deteriorate, the smooth and fair and appropriate way to provide for them is to fund them on an ongoing basis. So that's this concept of budgeted ongoing funding. It's not a singular event in the future that you're grimacing and hoping that doesn't happen while you still own a home in the association, because what's the cost is driven by the daily deterioration, one day at a time, and every owner is and should be responsible to pay for their fair share for the number of days, months and years that they were at the association, enjoying those assets and effectively using them up. Okay, few things. There's three parts to every reserve study, and so you're going to get three results. Part one is the component list you may have seen that the list of projects at the association. Part two is the evaluation of reserve fund strength. How much money do we have, and how do we feel about that? Do we feel good about that? Do we feel oh, no, we're way behind. And number three is, what do we do about that? What's our action plan? What's appropriate? What's our appropriate response to fund reserve? So there's three parts of the reserve study. That's what you're looking for. Number one, what are we up against? Now there's a nuance to this. The number two, the reserve fund strength, tells you how well your cash in the bank matches up to the amount of deterioration at the association. If your association that is older, the roof is old, the paint is old, the siding is old, and you don't have much in reserves, then you can appreciate that the value of that deterioration is large and your amount of cash is small. And we measure that in the percentage called percent funded, and that is a easy, accurate predictor of special assessments at associations. So we can indeed see the future at associations. It's primarily driven by looking at your percent funded. Now the zero to 30% range, percent funded is where special assessments are fundamentally common. The 30 to 70% mid range is where most associations are in the country. And we talk about special assessments being unusual here, not common, but every once in a while, irregular appearing, and then above 70% when you have more than 70% of the deteriorated value of your reserve components in cash, then it's smooth sailing. A special assessments are rare when you're at or above 70% funded. So that helps you see what's going on. And the nuance is that when you put these three things together, when you look at the components that are facing you in the next five years, if you look at that five year total, that gives you a little bit of color to your percent funded value. For instance, if you're in the weak range, let's say you're 25% funded. That puts you in the high risk of special assessment range. It just plain does. But if you're a brand new association, and you don't have any projects in the near future, and the developer only gave you $100 to start with, you're going to be percent funded is going to be very low. But the significance is almost immaterial. You look at your first five years of expenses and compare that to how much cash you have, and your first five years of expenses at a brand new association are going to be low. So you say, Yeah, not really a problem. We're not in a cash flow crunch. We may not have much cash, but we also don't have any pressure. And then the other the third thing is, are we funding per our reserve recommendation or not? Basically, I'm in Los Angeles. And the question is, Where am I, how am I going to drive if I'm going to go to San Francisco, if I'm going to go to San Francisco and I want to make time, I'm going to jump north and get on Interstate, five the freeway, and six hours later, I'll be in San Francisco. So the question is, am I heading north or not, if I am heading east, I'm heading towards Palm Springs or Phoenix, if I go far enough, and I'm not getting to my destination. So it's an important question, are you funding per your recommendation or not? And something we've learned, and for people who attend our webinars on a regular basis, we have regular, regular webinars at reservestudy.com they're free, they're wonderful, they're informative, they're we average once a month, some months more, some months less. But you can go to reservestudy.com, scroll to the bottom, sign up for our email list, and you'll get that once a month notification of what the next webinar is, and if you want to sign up for it or not, it's totally up to you. But we have these ongoing webinars, and we've said so many times there, the average association needs to be setting aside about 25% of its budget towards reserves in order to keep up with deterioration. The actual range is 15 to 45% and again, there's there's nuance to that, but it's primarily driven by the common area assets at your association, and if you are having to really step on the gas because you're in catch up mode, if you don't have enough cash, you got a major asphalt or roofing or siding or painting project coming close, and you've got to push on the gas to get ready spread it out over as many homeowners as long as possible before you get to a special assessment crisis. That's one of those very important nuances. Are you setting aside funds as recommended, or are you closing your eyes? And what do we say? See no evil, hear no evil, speak no evil. Yeah, if you're just doing an ostrich hole in the sand, then you are headed right towards special assessment land, and nothing we can do about that. That's up to you, and your homeowner is going to get slapped with a special assessment. If you don't do that, if you don't gather the money in a timely manner, you're going to get hit with deferred maintenance, which just gets more expensive, and if you don't do anything about it, then you get into eventually what we call the death spiral, which is where the homeowners aren't happy there. They starts to have more renters there, and I'm stereotyping here, but the home values don't keep up with those in the neighborhood, and yours just plain becomes a lousy association where the the rental owners don't want to raise the assessments, and it just becomes a dump. And that's your call, but that's how you can see the future coming. It's usually the three parts of your reserve study. Again, the component list, the evaluation of reserve fund strength- That is percent funded. Again, zero to 30% is high risk of special assessment. Fair range is 30 to 70% and the strong range is 70% and above that tells so much, right there, And then your recommended funding. that is, I'm not going to talk about a lot of the nuances of funding plans and calculation methods and all that for today. The bottom line is, want to keep it simple. You got to be thinking somewhere in the range of 25% and that's free advice here. Doesn't cost your reserve study. It just is probably what a reserve study is going to tell you, and you can save hundreds or 1000s of dollars just by saying that's what's going to cost for our association. And if you want to know what your number is for your association, if you're at 18% of total budget, or 29% or 34% I did a presentation a few days ago for an association, and their number is 32% it's just the way their common areas line up compared To the number of homeowners they have at the association. But come back to I think one of the very first things I said, it's all about Mother Nature and Father Time. I don't cause expenses. I just help you see them and prepare for them, and we help you not be surprised by the thing. Things that are not surprising anyway. I welcome your questions. I welcome your questions on reserves. We talk about so many different other issues here on the podcast. It's I love doing all these interviews to be surrounded by experts and fascinating people, but I'm the guy on reserves. And if you want to hear more about reserves, let us know we can do more. And you can also pop over to reservestudy.com to catch the webinars that we have there. So I look at the time. Thank you for joining me on today's program. There are professional reserves day providers all across the country. That's one thing I should add. How do you know who knows what they're talking about? Look for a credential on the cover of the report. They should have an RS, which stands for reserve specialist, or PRA professional reserve analyst. You need a reserve study professional helping you with a reserve study. You don't want an accountant, you don't want a contractor, you don't want an architect you don't want, I guess there's unlimited number of other things. When you're looking for a reserve study, get one from an RS or a PRA there's plenty of professional reserve study providers all across the country working to help you prepare for these major common area projects. They're not just possible, not just probable, but are inevitable and again, blame Mother Nature and Father Time. Thank you again. I hope you gained some HOA insights from today's program that helps you bring common sense to your common area. Thank you for joining us. Subscribe to the podcast, and we look forward to having you join us for another great, valuable episode next week

Announcer: 31:47

you've been listening to Hoa Insights, common sense for common areas. You can listen to the show on our podcast website hoainsights.org or subscribe on any of the most popular podcast platforms. You can also watch the show on our YouTube channel. Check the show notes for helpful links. If you like the show and want to support the work we do, you can do so in a number of ways. The most important thing you can do is engage in the conversation. Leave a question in the comments section on our YouTube video. You can also email your questions or voicemails to podcast at Hoa insights.org, or leave us a voicemail at 805-203-3130, if you gained any insights from the show, please do us a HUGE favor by sharing the show with other board members. You know you can also support us by supporting the brands that sponsor this program. Please remember that the views and opinions expressed by the podcast do not constitute legal advice. You want to consult your own legal counsel before making any important decisions. Finally, this podcast was expertly mixed and mastered by Stoke Light Video and Marketing. With Stoke Light on your team, you'll reach more customers with marketing expertise that inspires action. See the show notes to connect with Stoke Light.