Breaking the Barrier: Getting Your First Reserve Study!

Robert Nordlund 0:07
Thank you for taking some time out of your day to join us for a program on breaking barriers, getting your first reserve study for your association, or whether it’s your first one, or the first one a long time. And Joe and I are here to help you be prepared and not surprised about the issues and your decision points. I understand that a large number of people attending today are here, having a relatively fresh reserves study within the last three years. But I know you have other associations that you know of that you’re aching to give some good information to guide them forward to share what you know. And we’re going to be able to provide you with some great talking points throughout this session here today. Now, reserve say helps you make wise decisions to prepare your association for the future. And so in this session today, we’re going to set you and your association up for success for you who don’t yet have a reserve study. And this is the outline that we’re going to use today. Before we dive into step by step, what happens, joe and i are going to set the table by addressing why this whole issue of getting a reserve study is important. Most associations have a balanced budget, and most associations are reasonably well insured. But most associations don’t have a credible reserves that he prepared within the last three years. So most associations are stumbling forward into the future. And that’s a problem that needs to be solved. And it starts with this program. Today. What you see on screen is a national map of reserve study legislation, compliments of the community associations Institute’s the National Trade Organization, look for where your state is. And you’ll see that blue states have a specific reserve study or reserve funding legislation. Green states have some reserve guidance, but nothing real specific. 10 states have no legislative guidance or requirements. And as you heard introduced just a moment ago, Joe Weiss of wise property solutions is with us here today. I know Joe, through some committees we’ve served on together at CAI, as you can see you who remember your fifth grade geography, Tennessee is one of the blue states that just passed some legislation requiring reserve studies. So I want to welcome Joe to the program today. And from an experienced managers point of view, tell us about the new Tennessee legislation. So Joe, welcome to the program.

Joe Wise 2:57
Thank you for the invitation. Yeah, Tennessee passed legislation last year, Governor signed it one year ago last month. And it went into effect that the first of this year. And what it did is it called out in Tennessee, a requirement to have a reserve study for those communities organized under the 2008 condominium act. So if you’re doing math, you would recognize that that is a relatively recent act. And so it means that the law only applies to associations that have been chartered and organized since 2008. So it does not apply to all associations. And in particular, that doesn’t apply to older associations, but it is sort of a dipping of the toe into the water. And it is beginning the conversation here in Tennessee about the value and the importance of reserve studies for associations generally. So

Robert Nordlund 3:54
it sounds like it’s kind of starting with the easier situations, the newer properties and not wrestling with the beast of old properties, perhaps with a lot more deferred maintenance. That

Joe Wise 4:08
is correct. It I hope will serve as a as a model though, as some of these newer associations follow the law, which has a five year requirement and some of that what people will begin to see is if you do the right things, you get the right results. And so I’ve been told by those who are in the General Assembly that there are at least some who want to see the issue revisited, and perhaps it will be more comprehensive in its application. But right now it’s a fairly narrow slice of the pie. Got it?

Robert Nordlund 4:41
Well, I’m also thinking that as the newer associations get reserved, he’s all the reserve studies and stay looking nicer. It will also almost forced the older associations to kind of get with it to keep their properties better maintained and not lose ground economically. Is that Is that fair?

Joe Wise 5:03
I think it is, we certainly don’t have to look far to see associations that have 30 or 40 years of history of deferred maintenance. And you absolutely see the consequences of that in the values and sales prices in those communities, because buyers may not be able to tell you exactly what’s wrong, but they can see deferred maintenance, and they take a discount when they make their offer.

Robert Nordlund 5:28
Yeah, it’s just like any single family home that when you see a fixer upper, it looks like a fixer upper, you’re not going to pay top dollar for it. That is true. Got it? Okay. Well, let’s explore this whole idea of why more and more and more associations. In fact, all associations should be getting reserved a to guide themselves forward. And I wanted to share a few ideas of some of the reasons why we get clients coming in to Association reserves. And for the very first time, and one of them is associations that have just faced a traumatic special assessment, that was a bad experience. And they realize we don’t want to do that, again, let’s plan ahead to avoid that kind of problem. And, Joe, as a manager, do you see that a lot, that the

Joe Wise 6:17
special assessment is when you find yourself coming to terms with choices you’ve made? Yeah, absolutely. It’s, yeah. And so what it does is, it’s like the worst option. And it’s often the last option. And so what has generally happened is an association has just experienced that trauma, and is now hoping to write the ship and change course,

Robert Nordlund 6:43
I, there was a little thing that you said there that I want to bring out. We’re talking about board members facing either a special assessment, which is a bad idea, and a raising the homeowner assessments, which they’re also gonna say is a bad idea. And they’re left between two choices, but I’m gonna say one of those choices is a whole lot better than the other. Okay? Well, let’s look at let’s go down the list here. Another one is just, it might be a new board, or along the same lines, a board that just wants to make an informed decision. They’re tired of feeling their way forward, tired of stumbling their way forward. How do you see that in your role, and from your point of view, Joe,

Joe Wise 7:26
I think it helps boards because they’re not having to guess their way through it. But when you think about what a reserve study looks like, it lists all those all those elements that are of shared responsibility, it puts a present dollar value on what addressing their future replacement would cost. And then it inflation adjust that what it also does for a board is gives them an authoritative third party source to show their owners when they’re having these conversations about what it’s going to cost to be prepared for all the things the association needs to be prepared for. That isn’t just, you know, Charlie’s wild guests over here. It’s we’ve had somebody come in, and they’ve looked at what we have, they have assessed its likely useful life, and then they put a value on it. And so now instead of it’s too little, it’s too much and that kind of fruitless argument that’s free of any meaningful information, you now have a document that you can look at. And you can say, do you think the paving estimate of square feet isn’t accurate? Do you think the cost isn’t reflective of what the cost would be? It just gives you a shared sense of truth

Robert Nordlund 8:38
added. While let’s go another step further recommended by a manager, you’re in a position to be guiding associations month by month by month forward. And I would imagine it makes a manager’s job a whole lot easier if they have, like you say if they’re equipped or the association is equipped with that decision making document that serves as kind of a map forward? Absolutely.

Joe Wise 9:03
It is fundamental to our ability to manage a community is a recent and reliable reserve study. In the same way an insurance company is going to underwrite a prospective insured, a management company goes through a similar process. And so that process is is this association looking to hire a manager? They’ve got a reserve study, they’ve got a plan and they need somebody to help facilitate, or is this association looking to hire a complaint department that is going to be left in a reactive position that really oftentimes is is going to be largely counterproductive and unfruitful

Robert Nordlund 9:42
and then there’s even more going on. We see this in different areas around the country. Some areas the attorneys are more sensitive to it. And as they are giving guidance with respect to interpreting the governing documents and board’s responsibilities, how they can take good care of the property, how they can minimize your liability. We see attorneys recommending reserve studies, is that significant in your region of the country or not as much

Joe Wise 10:08
not as much, not as much with the attorneys. But but certainly with the next one, the insurance agents is very much a part of the conversation. Why speaking? Well, I was speaking to a prospective client here about two weeks ago. And it’s a 40 plus year old condominium community, they have a history of deferred maintenance. They’d never heard of a reserve study, when they were talking to me, though they had been with a management company, their insurance costs had quadrupled over two years, and their deductible had multiplied by a factor of five. So the premiums went up fourfold, the deductible went up five hold. And it was in large part because they had significant deferred maintenance, that the insurance company and particularly the underwriters were trying to hedge against, and the market in the insurance business is, is not good. And so how an association looks in terms of its capital assets is very much a factor in that whole process.

Robert Nordlund 11:16
Yeah, it got me just kind of looking up at the ceiling here thinking they are paying more money now, for less coverage. And that’s just, that’s crazy. But then again, if I was an insurance company, and I looked at that property, and I saw how deteriorated things were, I would begin to think I kind of don’t want to insure this place. There’s a lot that could go wrong. And it is so much in an associations best interest to take good care of the place, not just because of property values, but because of all the related costs the and right now, insurance has a really big cost. Absolutely. Okay. And then from my point of view, the biggest reason of all, the biggest thing that associations can’t change or deal with is mother nature and Father Time, those are unstoppable, indomitable forces, and they are tearing down associations on a daily basis. And the way board members put up a good defense against this is to have a plan and not get too far behind and not let that deterioration get a toehold at the association. Joe, as you were talking, I was thinking about the pictures on this next slide, a property that they’ve been casual about, there’s a lot of deterioration going on here at this association. And this is a property that is just ignoring the reality of what Mother Nature and Father Time can do. And

Joe Wise 12:40
by the spirit of full disclosure, not a place that I’ve ever visited. Good,

Robert Nordlund 12:45
I wanted to move on from that slide. So no one will have the chance of recognizing it. But all those all those pictures were from one property. And now I’m going to go back to the first slide of this section here on the program where we talked about legislation. And I want to remind everyone that you don’t need a law to tell you to pay the bill of ongoing deterioration, owning real estate is expensive. But fortunately, it’s very predictable. And that predictability of how long a roof is going to last how long the Asheville is going to last means that these things shouldn’t be a surprise. So just as you pay the insurance bill, and the utility bill and the management bill and all those other kinds of things. I want to encourage everyone here that this bill for deterioration is real. It’s ongoing. And it’s just part of life at the association. Yeah, I

Joe Wise 13:33
will often tell ords, when we’re having this conversation, this is not a question about if you pay. This is a question about how and when you pay. And the sooner you begin to come to terms with the overall cost exposure, the greater the array of options that exists for you. And the less painful those choices become. It’s sort of the difference between a 22 year old planning for retirement and a 62 year old planning for retirement. The further you get down the pike, the closer you get to those eventual costs, the kinds of choices you can make that can prepare you become more substantial. And and the array of options presented to you are fewer,

Robert Nordlund 14:20
I want to say to Paige our producer here today in our MC we should have Joe on the program more often. That was wonderfully articulated. Well, let’s, uh turn the corner here and talk about when you’re trying to make that decision when you’re trying to push it across the line and get that reserve study. How do you address objections that people might put to you about is this indeed the right decision? And one of them is just playing fear of the unknown. Why pay for something we’re going to ignore? Joe comments on that? Yeah,

Joe Wise 14:53
I’ve encountered that. I’ve also encountered situations where the resistance has been around perceiving the The study would result in conditions that would have to be exposed or disclosed, rather. And, you know, a research study is not a structural analysis in in that sense, it’s it’s a capital planning tool. And so sometimes it’s just a matter of having to come to terms with it. And honestly, in my experience for most board members, the unknown isn’t really unknown, as much as it is unquantified. They know the roofs coming. They know the pavings coming, they just haven’t put pencil to paper, and really been able to precisely predict what would that cost today, and inflation adjust that to five years from now, or whenever the eventuality is, then layer all those projects together in a plan so that you can comfortably say, we have every reasonable expectation that the money we’re going to need when we need it is going to be there to do the things we know are coming.

Robert Nordlund 15:53
Yeah, I again, I like the way you put that that I don’t think we very many times actually surprise people with an unknown expense, I think what we do more is just provide a decision tool kind of a path forward. So the board knows what their decision points are. Because I think the average person can see a fence that’s old, the pool that is no longer as shiny and attractive as it used to be everything like that. I just want to assure our audience here that the truth is reserve funding is pretty consistent at between 15 to 40%, of total budget, so that if you have a million dollar budget at your association, probably about a quarter million needs to be going towards reserves, just that portion of total budget, something in the order of that kind of range. So it’s not going to in general, it’s not going to double your homeowner assessments. And I want to set aside that fear. And then the question is, is it really going to make anything more expensive? Anyway? Joe, you touched on this, the costs are what the costs are. And board just has a choice of how they’re going to face them. Monthly assessments, or special assessments? That’s

Joe Wise 17:11
right. And whether you’re prepared or what you know, are you earning money? Are you earning interest on the money you’re going to use to replace the pavement? Or are you going to pay interest on the money you’re going to borrow to replace the pavement? Yeah, you know, it’s just a plant, it’s a matter of which options are you going to take advantage of?

Robert Nordlund 17:29
Yeah, and I liked that idea. Nowadays. Right now we’re getting three 4% on interest. And that’s like having another homeowner or two or three at your association paying into reserves. And that’s a fantastic thing, because associations can use all the help they can get in funding their reserves. But then there’s some associations that are have a magic target number that they’re trying to keep assessments low. And that always bothers me. How does that touch you on your sensibility scale?

Joe Wise 18:00
Well, I think people tend to have the wrong approach to evaluating assessments, because they’re either evaluating the assessment against their experience, you know, back at the beginning of time, the assessment was set at x by the developer, and that very likely was a marketing decision. It wasn’t a budgetary or financial decision. It’s just like, Well, I think we I think we can justify $50 A month or $100 a month, and so

99 Keep it under a threshold. Yeah, keep it under 100.

And so what happens is, everything owns to that original number, which may have no actual basis in actual exposure, or people will make the mistake of trying to true their assessment to what they perceive to be their peer Hoa is and very often, they fail to take into account significant variables that exist between one associations assessment and the next, in that, you know, this one may pay water, sewer and garbage and that one may not Well, that could explain 50% of an assessment, depending on the nature of the community. So I think that’s a well meaning intention that it’s a terribly misguided one, the better way to think of assessments is what will it cost to maintain the things the association is obligated to maintain? And then once we know what that number is, and the reserve study is a critical component of that, let’s back our way out of that number and say, Well, if that’s the total number, let’s divide it against the total number of people and figure out what we need to be doing to be ready for what we’re supposed to do. Now,

Robert Nordlund 19:38
right now, I’m thinking of a sports team. And whether it’s baseball or basketball, or football or whatever it is, every manager or general manager or coach is thinking we need a better blank to be a competitive team. You have this idea of what we need to do to compete in the market to have to be a nice place to live. And you go out and you will come I’ll push that you don’t say, Well, we’re only going to do this. And we’re gonna hover over here on the side and just meander our way forward. That’s, that’s no way to to get forward to a successful future. One thing I want to do is change some ideas. Some of you are probably thinking, we can’t afford reserve funding, who can. And I want to make it clear that the data shows that 72% of associations are doing at least a fair job of funding their reserves. So the majority are doing a pretty good job. We want to stay away from being the problem associations on the left. But the majority of associations are reasonably addressing their reserve obligations, and are somewhat reasonably prepared for the future. And again, we’re talking about, we can’t touch what Mother Nature and Father Time are going to do. They’re going to work their damage, but I want to be speaking to board members here, Joe, and I want to be speaking to board members and managers, challenging you. What are your choices doing? Where are your choices, leading the association? Are they going to lead the association to looking like Aspen creek here where we’re disorganized, sloppy, deteriorated and mismanaged, and like the five o’clock shadow on the sun, but it’s all a matter of choices? Where do we go from here? All right, let’s turn the page to the topic of actually getting that reserve study. What does that look like? So you’ve made the decision, you’ve addressed the objections, and now you’re going to actually get that reserve study. So what did the steps look like? Well, number one, it’s going to start with getting a proposal. And I’m going to recommend getting one from a qualified provider. Some of you may have been working with an in house volunteer, it’s time to get some real significant help here and get reliable guidance. And that reliable guidance is going to come from Psalm one, it’s going to be a person who has the reserve specialist, which is the RS acronym, or the professional reserve analyst. That’s the PRA acronym. So it’s a person with a credential not accompany. Look for referrals from neighboring associations, other associations managed by your management company, look in your car directory, do a Google search, ask for references, review a sample report all the normal kinds of things you would expect to do when looking to hire some help.

Joe Wise 22:22
And on that point, you know, in contrast to the neighborhood volunteer, that’s a well meaning exercise, and it’s certainly a start. But getting a qualified third party to produce this study and provide it to you is a huge hedge against board member liability down the road, because now you’ve employed somebody that by every reasonable business judgment standard is qualified to offer you advice, as opposed to just you know, your neighbor with an Excel spreadsheet.

Robert Nordlund 22:55
Yeah. And we also sometimes say that if the person doesn’t have the credibility to make the sale, then why are you having that person? Do the work? Because if you’re going to say all that was just friends with a spreadsheet, then what does he know? So look to someone who can make a difference and guide the association forward. And then know your choices. There’s three levels of reserve studies, there’s the full reserve study, which is created from scratch. And then there’s two different update products, the update with site visit, the update, no site visit, to our audience today, I think about AF, add a recent reserve study. And so they have their full reserve study behind them. For those that need a first reserve study that’s going to be that full reserve site, get that platform, that solid foundation of what the components are, and how much are they going to cost? What’s your life expectancy to get the information together. And then from that point in time, you have the almost more say, the luxury of working with less expensive products into the future. So it’s a great place to be, how much is it going to cost? A full reserve study is often in the range of about 1% of your annual budget. That’s a little bit of a soft number. But I want to encourage you to think it’s not going to be crazy expensive. But then again, it’s not going to be just flipping a nickel in the air either. It’s going to be a professional report. And often, we find that it’s roughly 1% of budget, and when to do it, reserve studies, our budget and cash flow guidance documents. So you’re going to want to do it in advance of your fiscal year end. It’s best to start that process about six months in advance because it usually takes about a couple months to get the reserve study done. So if you start at six months prior spend the month getting proposals making a decision, get the reserve study done, then it’s done three months in advance for your fiscal year end. So then you can start using that as you’re massaging your magic numbers, and figuring out what the new number needs to be to successfully move your association forward. And then how much involvement does it take on your part? While there is some physical involvement, or we’re going to ask for help getting into locked areas, that may be the boiler room, that may be the pool equipment area, but it’s also the documentation. What did your governing documents say about common area, we want to make sure that we’re not assigning repair and replacement responsibility to the Association for things that are owned and maintained by individual homeowners. And bullet number two is really important. I chose this graphic because of that one, providing cost history, I hope you’re collecting that. Because it’s absolute gold. To us. In the reserves, the industry of you can say, we had the asphalt seal coated in 2019, or $17,252, by ABC, asphalt, things like that. It anchors actual prices to your association, and we can begin to start tuning all the rest of our numbers towards those actual prices. And then budget information. What are your assessments at this time? How much room do we have? How close are you currently to where you need to be? What’s your current reserve fund balance things of those nature as we’re trying to put the financial side of the report together.

Joe Wise 26:24
But there’s a lot of information historically, especially on an first reserve study that the board or management is likely going to have access to, that’s going to be super helpful in producing the most meaningful document, in addition to resurface the pool two years ago, was there a new roof put on part of the building, but not all of the building? Do you have some mechanical or as built drawings, those sorts of things can help the reserve study process, because then you have a baseline for determining the likely remaining useful life of a particular element.

Robert Nordlund 27:01
Yeah, the timing and the cost, all that helps us do our job. And if you can tell us that we’ve got our record of all the major projects we’ve done in the last 10 years are literally going to lower the cost of your reserve study, just like taking good care of the property is going to lower the cost of your insurance premiums. These are the factors we look at when we’re preparing the reserves it because it’s all a bunch of time, it’s going to take us. And if you can help us and make things go smoother, it’s going to work out to your best interest. And what you get at the end, the end is three parts, you get a list of the projects that your obligations are coming, the evaluation of mathematical evaluation of your current reserve fund size, we’ll put it into the category of weak, fair or strong. And that helps you know what your starting point is very clearly, and our recommended multi year funding plan. And from that point, you’ll be able to start to think, Oh, gee, is that going to be too much? Is it going to be a shock? Well, we do ask for your current budget, because we want to find out what your starting point is, as we can stretch you and move you forward is that a small stretch, or is that a big stretch. But remember, we’re helping you see the future. And we want to help you prepare, and we’ll take as much time as we can. But it is a multi year plan. So expect that your reserves a preparer is going to try to work with you to try to create a plan that you can implement, that’s going to help your association have the right amount of money at the right time. And let me show you a little bit what that looks like in our reserves. A and most reserves size will have something like this an expense map. And you may know and like Joe mentioned earlier, you may know that your roof is aging, you don’t know when it’s going to hit or how big is going to hit but you’re going to see those kinds of things in the reserves eight. So you’re going to find out how many years you have until that hits? Or is your reserves, you’re going to tell you something like this, or like this with many years of significant expenses, or is going to be like this maybe a newer Association, where the larger costs have not yet hit. So these are the all the variables you’re going to get that are going to help you. It may not tell you reveal surprising things, but most likely, it’ll help you with the decision points show you’ll know what steps to take safely and successfully into the future. And

Joe Wise 29:40
it’s a helpful communication tool because it’s a way of adopting kind of common terms of conversation with your members and with your with your fellow owners. So that you can look at that and say, Well, we do all agree we have paving, you know and now let’s just look at how many square feet of paving we have. The other thing that can also do is in consultation with your reserve study provider, there may be assumptions in the original study where you’re able to have a conversation about well, you know, we may not be ready to do that in 2027. What does what does it look like if we push that to 2028? Or if we flip those two projects or, you know, do some of those things to massage those numbers to because it’s a model to get you to a, you know, optimal place for your association. Right?

Robert Nordlund 30:31
That’s a good point. Talk to you reserve a provider, find out how much wiggle room you have, how can that be massaged, because they’re interested in the success of your association, you’re interested in the successor, your association, and put those two heads together, and you have a good opportunity to create a great plan. While looking at the clock, and it’s time to bring this program to close on this talk now about the results, what do you actually get in a reserve study that’s worth all this trouble? Well, as we’ve said previously, with a trusted guide at your side, and you can kind of see it here, the trail is worn down. And a trusted guide is going to keep you on the trail and keep you from meandering sideways and getting yourself into trouble avoiding special assessment problems, avoiding board member reliability problems. And also the related effects of monthly board meetings that go long, because you have problems on every side, or the higher costs of insurance premiums are so many things that are better. When you’re walking down the path, a well constructed path towards the future. And then there’s a risk factor, the costs are going to happen. I hope we’ve made that point very clear. So for the roof that’s coming up for the asphalt boiler, whatever it is at your association, a reserved a divides that out and has everyone paying their small fair share along the way, making special assessments go away except for all the most truly surprising expenses that come your way. And then finally, home values. Curb appeal is real. And we’ve got a study that very clearly demonstrates that the association’s that are doing a good job. Setting side reserves have the cash to maintain their property keep it looking nice, they get projects done in a timely manner. And condo home values are 12.6% higher at associations with a strong reserve fund. And that’s the kind of hay back that makes all those reserve funding challenges look like small potatoes, because the payback that you get in home value is overwhelmingly a great thing.

Joe Wise 32:48
And you get to live in a place that is nicer to live in. Yeah,

Robert Nordlund 32:51
community enjoyment, owner appreciation, a few more smiles as you’re walking around the property. And all for the cost of what $37 more per month or $17 more per month or $82 more per month, compared to the cost of owning a home. Spending the right amount of money at the right time is a great way to maintain your real estate investment. Anyway, we’re at the end of our program here with there’s more resources at reserved a.com. Where we’ve got video resources, written resources, we have more written resources, we have this book, you can download chapter one for free, I’ll make sure that link is in the outline, or you can buy the book on Amazon, we have this tool, online tool that comes with every reserve study that allows you to do those little What if type adjustments, because we want you to take ownership of that reserve, study and interact with it and make it a plan for your association. We want you to know what the sensitivities are. We’re recording this program. And we have so many other prior reserves, study and reserve study related programs. They’re all on YouTube. So search for them, subscribe to our channel, give them a like. And we’ll do more and more and more the kind of programs that you are interested in us presenting, and we have a new opportunity for you. Starting last year, we developed a weekly 30 minute podcast for board members. It’s called HOA insights, common sense for common areas. I encourage that for all your board members. It’s a weekly dosage of encouragement and insights that are going to equip you and get you a little better prepared for next month’s board meeting and all the decision points that you need to make. And Joe we’ve got you here at wise property solutions. Can you talk us through your website and what you do here? Well, we serve

Joe Wise 34:45
communities across East Tennessee so if anyone is in East Tennessee, we would certainly love to hear from you. And as you can see from the pictures you might want to visit if you aren’t from East Tennessee. That’s all I would say. Yeah,

Robert Nordlund 34:59
well I met Joe through committee work with CAI Joe’s company Wise property solutions is aptly named. I enjoyed his comments the way he moved things forward. I think Johnson City is got to be a better place with him as mayor and I certainly appreciate him joining us today for the program. But at this point in time, it’s time for us to turn the microphone over to page. We’ll coordinate our q&a time together.