How to Read an HOA Reserve Study, and What Percent Funded Tells You

An HOA reserve study is a report that lists the big parts of a building, estimates when each one will need repair or replacement and what that will cost. Percent funded compares the cash the association has actually saved with the amount the study says it should have saved by now. A higher percent funded means the owners have been paying ahead for work the building will need.

The monthly fee is the number everyone asks about. The reserves decide whether it stays that way. At Rooster Homes™, the reserve summary is one of the first pages we open with a condo buyer.

This guide explains how to read a reserve study for a Los Feliz condo or townhome. It covers what the study contains, how percent funded is figured and which lines to check first.

Under California Civil Code section 5550, the board has a reserve study done with a visual inspection of the major components at least once every three years. This applies when the replacement value of those components is at least half of the association's gross budget, not counting reserves. The board also reviews the study every year.

The study has to include, at a minimum:

• The major components the association must maintain that have less than 30 years of useful life left.
• How many years each one probably has left.
• What each one will cost to repair or replace.
• How much the association needs to set aside each year to pay for them.
• A reserve funding plan that shows how the association intends to pay for it.

Major components can include the roof, the elevator, paint, paving, pool equipment and shared plumbing. The law also counts gas, water and electrical lines where the association is responsible for them.

Percent funded is a simple fraction. The top number is the cash the association has actually set aside. The bottom number is the amount the study says it should have by now.

Section 5570 gives the formula for that bottom number. For each component, take the current cost to replace it. Multiply by the years it has been in service. Divide by its useful life.

Here is a hypothetical example, not a real building. A roof costs $300,000 to replace and lasts 25 years. It has been in service for 15 years. The association should have $180,000 saved toward it by now. If it has $135,000, that roof is 75 percent funded.

The study adds up every component the same way. The result is the building's overall percent funded. The law also asks for the shortfall on a per-unit basis under section 5565. That per-unit number tells you roughly what share of the gap sits with each owner.

You do not have to read the whole study to find it. The association sends a short form each year with its budget, called the Assessment and Reserve Funding Disclosure Summary. Section 5570 sets out what it says. The seller provides it during escrow as part of the budget report documents.

Check these lines first:

1. Line 3. Will the projected reserves be enough to cover major repairs each year for the next 30 years? It is answered yes or no.
2. Line 4. If the answer is no, what added assessments would be needed, when and how much per unit.
3. Line 6. The amount the reserves should hold at the end of this fiscal year, the cash expected, and the percent funded.
4. Line 7. The same numbers projected for each of the next five years, with and without the board's funding plan.

Line 7 shows direction. A building at a modest percent funded with a plan that raises it each year reads differently from one where the number is falling.

• The date of the study. Check when the last full study with an inspection was done and whether the annual reviews are current.
• Big items coming due soon. Look at the components with a few years of life left and a large cost. A roof or an elevator due in the next few years is worth a question.
• Deferred work. The budget report says whether the board decided to defer or skip repairs on a major component, and why.
• The balcony inspection. For condo projects, section 5551 requires an engineer or architect to inspect a sample of wood-supported balconies, decks and elevated walkways at least once every nine years. That report is folded into the reserve study.
• The assumptions. The summary states the interest rate and the inflation rate the study assumed. Very rosy assumptions can make the reserves look stronger than they are.

The law does not set a passing score for percent funded. Read it next to the funding plan and the items coming due.

When something in the reserve summary is unclear, write the question down and send it to the association through the listing agent. These are the ones we ask most often:

• When was the last full reserve study with a site inspection, and who prepared it?
• Which major components are due in the next five years, and what are the current cost estimates?
• Has the board approved a plan to raise the percent funded, and is it on schedule?
• Has the board discussed a special assessment or a loan for any upcoming project?
• Has any work been done since the study that changes its numbers, such as a new roof or new pipes?

The answers help you read the study as it stands today, not as it stood the day it was written. Keep them with your escrow file so you can find them later.

• Reading only the monthly fee. The fee and the reserves belong together. See what a Los Feliz HOA fee covers.
• Reading one year alone. The five-year projection on line 7 shows where the building is heading.
• Skipping the board minutes. Minutes often show what the study cannot, such as bids for a repair or talk of a loan.
• Waiting until the last day of the contingency. Ask for the documents as soon as escrow opens so there is time to ask questions.

Here is a hypothetical example. It does not describe a real building or a real client.

A first-time buyer is comparing two Los Feliz buildings. Building A shows a high percent funded, and line 3 says yes. Building B shows a lower percent funded, and line 3 says no. Its line 4 lists an assessment the board expects in two years for elevator work.

The buyer still likes Building B. We ask the association about the elevator plan and read the minutes for the bids. The buyer then decides with the future cost in the price math instead of as a surprise.

Rooster Homes™ is a Los Feliz, Los Angeles real estate brokerage owned by Brandon and Sarah Arlington (DRE #02051216) helping buyers and sellers of Los Feliz condos and townhomes. We ask for the association's documents as soon as escrow opens and go through the reserve summary with you before you remove your contingencies.

New to condos? Start with our guide for first-time condo buyers. Buying to rent? See buying a Los Feliz condo as an investment. Then send us a note and let us know what works best for you.

This guide explains how reserve studies generally work. It is not legal or financial advice. For your own situation, talk with a real estate attorney or CPA.