Everything You Need to Know About Reserve Study

Real estate properties consisting of land and the buildings on it have always been thought to be the best investment any person could have as their values are always bound to appreciate over the years. Any piece of land may triple in value in two decades’ time. This also is true with buildings.

When you have a real estate property, you can really market it any time and have the ability to see revenues after it. Nevertheless, to purchase a property does not mean you will certainly get rich as soon as possible. In most cases, it will take years before a rise in the value of the residential or commercial property can be seen. During the process, you also need to be certain that your buildings and structures will still be of value to your prospective customers, withstanding the normal building wear and tear. That said, a piece of land with a shabby framework will certainly have lesser worth contrasted to land with a well-kept building or any other framework. In order for your property to yield a return of investment which takes years to proceed, you further need to ensure that what you put into the building will potentially increase its worth and not the other way around. Hence, it is a sensible option to have a comprehensive reserve study done on your real estate property.

Reserve Study – What Is It?

Reserve study is a report prepared by professionals containing an assessment of the full cost of a real property’s components after essential considerations. Aside from the basics, this could also entail the painting, roofs, concrete structure, landscape replacement, and a lot more.

Basically, a reserve study is made up of three parts: the list of property’s components, the reserve fund strength, and the funding plan.

Property’s Component List. This is a detailed list of all the components in the property including an inventory of the subcomponents in the main building and secondary structures like gazebos, pools, guest houses, and the gates. The said list can be derived from a visual property inspection. Moreover, in this part, each of the components’ values is also assessed in light of their latest market value, wear and tear, and the due date for replacement or refurbishment. For instance, the reserve study conductor would make an estimate of the cost needed to repair the roof after a particular period of time, e.g. a year, depending on the materials used. To arrive at an estimate, a lot of research is needed.

Reserve Fund Strength. This part of the study presents the total reserve fund that needs to be maintained by the property owner and all the backup information and justification of arriving at that figure. The reserve study conductor, in this case, considers the sources of the reserve fund as well which could be from the property owner’s savings, or the property owner’s profit or assets if the real estate property being studied about is an income-generating one and the purpose of this is to gauge the owner’s capability of funding the needed property maintenance and upkeep. At the end of this part of the study, a conclusion that assesses the owner’s reserve fund strength, e.g. poor, fair, good, will be indicated. This will prompt the property owner to seek financial assistance from other sources, e.g. asset liquidation, loan, etc., should he not be able to meet the necessary fund for the needed upkeep and repairs.

Funding Plan. This part of the study gives the property owner a forecast of his finances and resources’ health which will be assessed in terms of cash availability and financial flow in the coming years. This will help the owner have a guided financial decision.

Reserve Study – Who does it?

Anyone can conduct a reserve study just as anyone can do things they are willing to do. However, as the reserve study result plays a critical role in relevant property-related financial and business decisions, it is best performed by a reputable reserve study company that has a team of professional specialists that are seasoned in creating reserve funding plans.

Reserve Study – How and when to get it done?

It pays to seek help from a reliable firm that can perform a reserve study for your property. A good reserve study firm has a team of accountants, marketing experts, and even engineering and architectural experts playing and working together to come up with a complex and extensive report. While their professional fees are usually higher among the options, their quality of work will help you save time, money, and effort in keeping your property in great shape.

Most reserve study processes begin four to five months before the beginning of another business/budget year. If the property to be studied for is a non-income generating one, a reserve study is best done at least five years after the property was built. Meanwhile, if it is a business property, the frequency of reserve study will depend upon how complex the components and process of document routing and approval.

Firms perform different types of reserve study services which vary ultimately in terms of scope. The worthiest yet also the priciest type of them all is having a full, most comprehensive, reserve study. This service entails a site inspection and extensive research and a series of engagements, observations, and information gathering with the property owner or business property management and maintenance staff. Meanwhile, for property owners with a lesser budget for a reserve study, there are reserve study services that have no site visit inclusion. Usually, this least expensive reserve study option only yields an updated reserve study report based on the previous studies and the recent changes.

Reserve Study – Why is it necessary?

In most countries, a reserve study updated on a yearly basis is required by law. Some law also requires physical property items inventory every three years to reflect the changes in the prices of materials in the market. In conducting a reserve study, relevance is of utmost importance.

Compliance aside, a reserve study is necessary more importantly because it helps property owners ensure that their properties are always in excellent condition, thus in high value, in case they have to be sold in the future.