What is a reserve study on a condo?

When you purchase a condo unit, you own the “walls in”.  Other areas of the building (i.e. halls, roof, siding) are considering “common areas” and are funded and maintained by the HOA (homeowner’s association).  In addition to the mortgage you’ll pay on the unit, you also pay a monthly HOA fee.  What is included in this fee depends on the building but usually it covers a few utilities and a contribution to the building’s reserve.

A condo’s reserve is essentially its savings account.  If a repair is needed on a common area, the HOA can use funds from the reserve to cover the cost.

Unfortunately, until a couple of years ago, the amount of reserves a condo maintained was not regulated.  Some HOAs kept large reserves and others, in the interest of keeping the monthly dues low, maintained very little reserves.  This is where the trouble started.

For condos with small reserves, when an expensive repair comes up, the owners have to shell out the money that the reserves do not cover.  This is called a special assessment.  Some condos have assessed individual owners as much as $20,000 before!

So what is a reserve study?  A couple years ago, the industry recognized the poor practice of small reserves and the financial distress it had caused for condo owners.  To avoid this, they started to require reserve studies that would go over the financial state of the condo and set out regulations for future financial practice.

Lenders like condos that have completed reserve studies because their more fiscally responsible and are meeting higher standards than other buildings. 

If you’re a condo owner, make sure your building has conducted a reserve study or is at least in the process of completing one.  If you’re looking to purchase a condo, make sure you ask if the HOA has a reserve study during your investigation of the property.