Jan. 16, 2006 - How much is enough to have in Reserves?

I often get this question when someone is buying a condo.  Why is $900,000 insufficient at one complex and $100,000 more than enough at another complex?

Simply looking at the dollar amount in the Reserve Fund doesn't tell you anything unless you know how much is supposed to be there. Say you have three complexes that are identical.  Each has a replacement cost for the roof of $300,000.  Each has a composite roof with a 20 year shingle.  The first complex is 19 years old, so it should have almost $300,000 in reserves just for the roof alone.  The next complex is 22 years old and just put on a new roof, so they need $300,000 less in reserves than the first complex.  The third complex is 10 years old and should have $150,000 in reserves just for the roof.

In order to know how much is enough, you need to see and know how to read the Reserve Study.  The Reserve Study lists every major component in the complex that will some day need to be replaced.  It lists the life expectancy of every component and its remaining useful life.  If you see a lot of zeros in the remaining useful life column, then there are many things that should have been replaced already that were not replaced yet.  If you have low reserve dollars coupled with a lot of zeros in the remaining useful life column, that is a problem. 

Go to your HOA Board meetings if you already own a condo and check out your reserve study and reserves.  Make sure the monthly fee is sufficient to keep the place well maintained and your property value will be better protected.