Texas Reserve Studies 101: What is a COA or HOA Reserve Study?

What is a Texas COA or HOA Reserve Study? 

Keeping your homeowners association (HOA) or condo owners association (COA) financially healthy is as important as maintaining your property itself and the amenities residents enjoy. Optimal financial health means keeping a dependable safety net ready for the inevitable bigger expenses that naturally come with running a thriving community. For your association, this financial safety net is your reserve fund.

So how much of a safety net does an association like yours need? This is where a reserve study comes in. While Texas associations aren’t required by law to perform them, reserve studies help COAs and HOAs plan for the future with the goal of spending less in the long run (without having to perform a special assessment).


 

Why does my board need a reserve study?

Think of a reserve study (or “capital reserve study”) as the ultimate budgeting tool - a thorough health check-up for your association’s assets. A reserve study is a deep dive into your association’s current finances, how your community is doing overall, and predicts when things on your property might need to be fixed or replaced. A reserve study gives your board a clear financial plan to keep your community’s assets well-maintained.

Since almost 70% of HOAs across the country have underfunded reserves, wouldn’t it be useful to know where your association stands? Wouldn’t it be beneficial to know if you’ll be able to cover upcoming repairs needed to keep your community safe?

Also, responsible budgeting and ensuring fair funding also fall under the Board of Directors’ fiduciary duty to the community. Proper stewardship of the association’s reserve fund means the board is responsibly using homeowner’s dues to keep the community safe and beautiful. Fair funding is a key reason for conducting a reserve study, as it calculates each owner’s fair share of the depreciation of the community's components.


 

What is a COA or HOA reserve study process in Texas – where do we start?

Start by hiring a professional. Your professional management partner should have a network of trusted reserve specialists ready for when your board needs this service. Additionally, the Community Associations Institute (CAI) offers a Reserve Specialist® (RS®) designation, so this is also a good place to start.

See “5 Steps to the Best Reserve Study Firm” to help you choose the right reserve specialist.

Reserve studies usually take 2-3 months to complete. However, they are crucial to ensuring your association maintains adequate funding and can budget for larger-scale projects over time.


 

What happens in a reserve study for Texas COAs and HOAs?

A comprehensive reserve study has two main parts:

1. Physical analysis – Your reserve specialist looks at the current state of your community’s shared spaces and estimates the cost to repair or replace major areas.
2. Financial analysis – The specialist checks how much money is in your reserve fund and suggests how much you should contribute to keep things maintained in your community.

 
Within this full reserve study, there are five steps:

1. Inventory – Your reserve specialist will list all the major components of your community.
2. Assessment of condition – The specialist will then evaluate and note the condition of each component.
3. Estimates – Your reserve specialist will approximate each component’s longevity and replacement cost
4. Status of funding – The specialist will assess your association’s current fund balance.
5. Plan for funding – After evaluating your community, its components, and your association’s current reserve fund, your reserve specialist will work with your board to create a financial plan for future funding needs.

A comprehensive reserve study is detailed and more expensive, but you typically only need one full study unless you want a second opinion later. After the initial study, you can opt for less-detailed, more affordable updates, sometimes without a site visit later to keep your reserve funding in check.

What is a COA or HOA reserve study level? How do I know which level of reserve study my Texas board needs?

Reserve specialists perform three different levels of reserve studies. Your board should always start with level one, then use levels two and three as tools to maintain your community and association’s reserve fund.

1. Level 1: Full reserve study

This is your comprehensive check-up, covering both physical inspections and financial evaluations.

2. Level 2: Update with onsite inspection

This one revisits the Level 1 study, adding a visual inspection to keep components up to date.

3. Level 3: Financial update only

This is a quick review to make sure your financial plans are still on track—no need for a visual inspection here.

How often should my Texas COA or HOA do a reserve study?

Your COA or HOA should have different levels of reserve studies performed depending on your needs, which may include:

• Time-based: You should revisit a full Level 1 study at least every 3-4 years. If you have loans, your lender might have specific update requirements.
• Major repair: Update the study when something major gets repaired.
• Adding assets: Bring the study up to speed when new amenities like playgrounds or pools are added.
• Issue/event: If events like weather damage impact your assets, it’s time for an update.

 

Three types of funding for reserves

The National Reserve Standards outline three main goals for reserve funding:

1. Baseline funding: This approach aims to keep the reserve balance above zero. It provides the minimum level of funding, ensuring that the reserve cash remains positive but doesn’t offer as much buffer compared to other strategies.
2. Full funding: Under this strategy, the reserve balance is designed to align with the association’s wear and tear. An example approach to this: Each year, set aside a portion of the replacement cost based on the asset’s lifespan. So, for an asset with a 20-year life, you’d save 5% of its cost each year.
3. Threshold funding: This method serves as a middle ground. It targets either a specified cash amount or a certain percentage of the funding goal, providing a balanced approach between minimal and full funding.

In other words, this approach finds the balance where your association has enough funds for projects, repairs, and replacements without hoarding excessive reserves.


 

What is a COA or HOA reserve study cost – is it worth the expense in Texas?

Costs can vary based on your community's size and the level of analysis needed. However, don’t let the price stop you from doing a reserve study—it’s an investment in your community’s future and will ensure you spend your association’s funds wisely. Again, reserve funds ensure your COA or HOA spends less overall and helps prevent special assessment fees (which no one wants).

See long-term consequences of not doing a reserve study here.

Why are reserve studies important for COAs and HOAs in Texas?

Every asset has a shelf life and will eventually need repair or replacement. A reserve study ensures you have the funds to cover these expenses. Without sufficient funding, your association might have to levy a special assessment or take out a loan, which can be pricier than keeping a well-funded reserve account.


 

Benefits of a Reserve Study for Texas COAs and HOAs

Just because a reserve study isn’t legally required in Texas, your COA or HOA will benefit from it for several reasons:

• Avoid special assessments or loans - Proper planning reduces the need for unexpected fees or borrowing.
• Show good financial stewardship - Demonstrates to residents that you’re managing funds responsibly
• Simplify budgeting - Makes annual budgeting easier
• Meet legal requirements - Ensures compliance with any applicable laws
• Plan for repairs and replacements - Helps you better prepare for future expenses
• Boost property values - Well-maintained properties are more valuable.
• Schedule capital projects - Makes it easier to plan and budget for large projects
• Accurate vendor bids - Provides a more precise basis for evaluating contractor proposals

 

Conclusion

Understanding and performing reserve studies are crucial for the financial health and maintenance of your community. Regularly updating your reserve study ensures that your COA or HOA remains financially secure and well-prepared for future needs.

For comprehensive reserve studies or additional budgeting tools tailored to your community, your management company should provide banking partners who always ensure the healthiest financial standing of your COA or HOA.