I have written posts in the past about this topic noting my chagrin that WA didn’t have a Law that required Condo Homeowner Association Boards to have a Reserve Study done. Well I’m pleased to announce that such a law was passed. Here’s a link to Elizabeth Rhodes of the Seattle Times article on the subject. The law has no teeth yet, and has everyone confused for a lot of reasons, but it’s a step in the right direction. Rome wasn’t built in a day.
This is a subject that is near and dear to me, because I have witnessed too many times the long-term affect not having a Reserve Study, or a requirement to have a Reserve Study, has had on Seattle Area condo buyers and sellers. I am so happy about this new law I could stand on my head and spit nickels.
If you are on a condo Board of Directors, this is a VERY important concept for you to understand and embrace. Please post any questions you may have about the importance of a Reserve Study (not the law “requiring” it) and I will be more than happy to expound on the topic to the extent of my ability. I’m a real estate agent, but I had the opportunity to manage several associations and help them with Reserve Study requirements in “a past life”. I also understand the relationship of Reserve Study to setting accurate monthly dues. And last but not least, how very important it is to buyers of condos to have a Reserve Study Summary Page in the Resale Certificate.
HOW MUCH SHOULD THERE BE IN RESERVES?
Honestly, no one can answer that question unless there is a Reserve Study done and the ability to review the Reserve Study. Here’s why. Condo Reserves are not about HAVING reserves. In fact, having too much in reserves can be just as harming to an Association and condo values, as having too little.
Putting money in reserves is not like saving X% of your money for “a rainy day”. Putting money in reserves is like saving for a new bike when you were a kid. You want a bike. It costs $100. You know if you can earn and save $20 a week, it will take you five weeks. If you buy the bike, but have the foresight to know that you want a new and better one next year, you might set the bogey at $250 for a new bike in 12 months and save $5.00 a week to that end. When you have the $250, you get a new bike, or you stop saving for that particular item at that point. Reserve Studies are THAT simple.
In a Condo Association you are like a kid saving for a new bike for every “major component” of your property. NOT ANNUAL MAINTENANCE ITEMS, but REPLACEMENT COST items. So how much is enough and how much is too much to have in reserves? If you don’t have $250 the day you are scheduled to go get the new bike…not enough. If you still have $250 in the account the day AFTER you buy the new bike, you saved too much. The danger of saving too much is that you have falsely created a monthly condo fee that is too high, and your property values may have been damaged as a result.
HOW IS A RESERVE STUDY DONE AND HOW MUCH DOES IT COST?
A FIRST TIME Reserve Study will cost a lot. About $2,500 depending on the size of your Association. A 20 unit complex with no amenities Reserve Study will cost less than a 700 unit complex with two pools, an exercise room, two lakes and 8 elevators :) After the first one is done, the updates cost much less and usually no one has to come out and the update is “a computer function” of numbers adjustment. You tell them you just replaced the mailboxes, and they do a reset of Useful Life for that item and spit out a new page and Reserve Study Summary. A simplification, but you get my drift.
Someone comes out and makes a list of Major Components. The Board of Directors normally sets the dollar amount of “Major Component”, though the Reserve Study Company will make a suggestion or have a standard you can follow. If you have 10 units and need a $2,000 item, it costs everyone $200 to get it. If the cost of those condos is $450,000, then maybe asking everyone to chip in $200 is not a big deal. But if the cost of those units was $159,000, then asking everyone for $200 IS a big deal. If you have 700 units, then everyone kicking in $2.87 is no big deal. Maybe you call that a “minor component” and save for that only if you have all Major Components covered.
THAT IS WHY the definition of Major Component is left to the discretion of the Board of Directors of each Association. Fees being too high hurts you as much as fees being too low. There is more than a $15 difference between dues of $295 a month and $310 a month, than $250 and $265 when it comes to property values. The Board has to be aware of pushing that fee beyond certain “keypoints” without GOOD reason.
New Roof, Exterior Painting, Replacement of Fences, Resurfacing the Pool, new mailboxes, are examples of Major Components for most Associations. NEW ELEVATOR is a really good example of why one Association with $500,000 in Reserves can be BETTER than another with $750,000 in Reserves. If the second has 3 elevators, or a very expensive many floor elevator, their Reserve Needs will be higher than an Association with no elevator and other similar Major Components excluding elevator.
(Kim asked about windows – no not windows or sliding glass doors or garage doors. Almost always they are “owner responsibility” items as to cost. The Association chooses the contractor to be used and type of product, but since the owner pays, these are not part of the Reserve Study. Each Association is different, but as a general rule, know that these items are not part of what an Association pays for as to replacement.)
WHAT DOES ALL THIS HAVE TO DO WITH MONTHLY DUES?
Monthly dues are a combination of two numbers.
1) Monthly amount needed for Operating and ongoing Maintenance. Landscaper (not replacement cost of trees but the cost of monthly service). Property Management Fees. Cost of electricity for lighting the common areas. Regular pool maintenance and chemicals (not resurfacing or pump costs)
Let’s say Operating Costs are $5,000 a month and there are 50 units. $5,000 divided by 50 equals $100 in dues for Operating Costs. Many Associations do not divide evenly by number of units, they do it by square footage or value of units, but I’m trying to keep this simple.
2) Reserve Needs.
A Reserve Study will spit out a final number and tell you what you need from each owner, each month, to have enough for replacement items.
Let’s say they need $30 from everyone for an eventual new roof, $20 for new siding some day, $10 to repaint the place every 10 years to increase the life expectancy of the existing siding and $40 for all other major components combined. Then the Reserve Study Summary will say you need $100 from everyone, every month, for “Reserves” and you must put that money in Reserves every month FOR THAT EARMARKED PURPOSE!
IN THE ABOVE EXAMPLE, DUES SHOULD BE $200 A MONTH, NO MORE AND NO LESS. $100 for monthly operating costs PLUS $100 to put into Reserves.
HOW DO I AS A CONDO BUYER OR OWNER KNOW IF THE AMOUNT IN RESERVES IS ADEQUATE?
There is a RESERVE STUDY SUMMARY that IMNSHO should be in every Resale Certificate and submitted to every owner once a year at the AGM (Annual General Meeting) or Budget Meeting (often the same meeting). It’s a few pages. The actual Reserve Study is a big book with photos, and so usually not distributed out to anyone who wants to have it. Though it is usually available for review and by appointment upon request. Often every Board Member gets their own copy, but other Association Members do not.
The Reserve Study Summary will list all major components, their useful life, and their Remaining Useful Life. These will be shown in columns for every Major Component. A quick glance of Remaining Useful Life Column will give you a feel for the health of the Association. If you see items with Remaining Useful Live ZERO, that’s a big red flag! That means the item should have been replaced, but wasn’t. Most reserve studies do not go into negative status like -5 years to let you know the item should have been replaced five years ago (I wish they did). Most often they will say “0″.
This is a long topic, in fact it takes a chapter of a book to really explain it well, but hopefully the above offers some practical information you can use to comply with this new law. It’s a good law. Embrace it. Don’t try to find the loophole to get around it.
If you walk around an area with a lot of old condo complexes in disrepair, know that was caused by WA not having a Reserve Study Requirement, to some extent. Know that a healthy Association is not only important to the owners of the condo units, the buyers of the condo units and the sellers of condo units, but everyone impacted by “an eyesore” in the neighborhood.