News
Periodically we will write news articles pertaining to the latest industry trends. They are inspired by frequently asked questions by our current clients and/or those who inquire with us. We hope you find them helpful.
We are currently featuring:
How to Pre-Qualify Your Reserve Study Provider (so that your buyers can qualify for financing if/when the time comes to sell)
by Jeff Samdal, PE, RS, PRA (March 18, 2010)
Imagine needing to sell your condominium only to find out that you simply might not be able to, even if someone wanted to buy it from you. It turns out that your buyer does not have all cash (like most) and is using financing (such as FHA) that requires evidence of a healthily funded association with long term plans to stay that way. The financial institution is not being unreasonable; they are simply trying to evaluate the risk of loaning the money to the buyer. After all, they want to ensure that their collateral is in good condition.
Evidence of such financial health is most frequently found in reserve study reports, and the financial institution will likely request a copy of a recent one (typically no more than two years old). Reserve studies are reports that consist of common area property and replacement/repair costs that are used for long term budget planning. They will assess the current financial health of the association’s reserve fund as well as create a plan for future funding to offset anticipated major future common area expenditures. They will also report on the overall health of the current funding plan, including what percent funded they are compared to what they should be. This number – percent of full funding – is what financial institutions will base their assessment of financial health on.
But not all reserve study providers (or their reports) will produce the same results. In some cases they can do more harm than good. It is not uncommon for an entire property to be denied financial approval because a reserve study indicated poor reserve funding. It is also common to discover that if the reserve study had been conducted properly in the first place, there never would have been a problem.
Not too surprisingly, becoming savvy to the differences in how studies are conducted is the best way to avoid the above scenario. If your association needs a reserve study – and all should consider one —know that one study does not equal another, and the results you get will affect your dues, the ability (or not) for you to be able to sell if the buyer needs financing, and long term property maintenance (or lack thereof).
So, how do you pre-qualify a reserve study provider? Providers are coming out of the woodwork, and not too surprisingly, they do not all provide the same service or result. On the flipside, years of experience does not necessarily equal quality results either. First thing's first... get multiple quotes and pay attention to the details of what is being offered. The lowest price is not always the best value. And do not be afraid to ask important questions, such as:
1. Who will actually show up on site to perform the analysis? What are their qualifications and experience?
Did you know that there are no requirements in Washington for an individual to conduct a reserve study? Their liability regulates this a bit, but not as much as one would hope. Check the qualifications of the individual (not just the company) who will be showing up at your property to conduct the analysis. It is common for a company to sell the qualifications of the top ranking individual in the company, but then to send out someone far less experienced. If your onsite analysis is poorly conducted, the report cannot be any better. And this obviously can affect the results of financial approval or not.
Look for credentials such as RS (Reserve Specialist, an accreditation through Community Association Institute); PRA (Professional Reserve Analyst, an accreditation through the Association of Professional Reserve Analysts); PE (Professional Engineer, a license through the State); RA (Registered Architect, a license through the State).
2. When deriving results, how are replacement/repair costs defined?
Your onsite evaluation will reveal items that need repair or replacing over time, and the cost to do so will determine the overall dollar amount that needs to be in the reserve fund.
Pre-qualify your provider by asking for the source of their reserve study numbers. Do they know the answer? "Our proprietary software" is not a real answer. Are the numbers sourced from local, real, recent estimates? Prices of some reserve items have changed dramatically in the last couple of years and they can also vary from region to region. Ask if they ever incorporate real construction bids to determine pricing. You cannot be more accurate than an estimate from a trusted contractor that could actually be used if needed.
Be aware: providers will always state that they provide "opinions" of probable cost for liability reasons. You just need to make sure that those opinions are based on some version of reality.
3. Will you attend a Board meeting to help answer questions? And are you willing to consider feedback received during these meetings?
What if you have difficulty understanding how results where derived or you think there are inaccuracies? What if your association wants to paint interior hallways every ten years instead of the five years that the provider has listed? Or what if you recently replaced your roof for $100,000 but your provider says it will take $300,000? How does the reserve study provider incorporate feedback, and are they willing to attend a meeting to explain important questions such as these? A provider who is truly working on your behalf will address each of these concerns.
4. Can you provide references from recent properties similar to ours?
The proof is in the pudding. Ask for at least three references from communities that are similar to yours. Ask each community why they chose the current company to work with. Would they use them again or refer them to a friend? Was the community able to use the report as evidence of adequate financial health to a lender such as FHA?
Additionally, almost all providers have sample reports that they are more than willing to share. Request a sample from a property similar to yours. Each provider has their own style and finding the best provider for one property might be different for another. Some are heavy on graphics, some on content, and some integrate both. There is no “one size fits all” solution and whether you are a board member or a property manager, weigh the costs/benefits of each provider and pick the one that best suits your needs.
Lastly, do not ignore the results of your reserve study, regardless of if you like them or not. Many properties are simply not funding their maintenance funds properly and the problem will only get worse over time. And, of course, no reserve study provider can guarantee approval from any lender.
[back to top] |
