Condo Association Management Blog

Proper reserves do not increase the property value. However, they do have an affect on the sale price and the ability to sell as it directly affects loans and loan options. 
 
As a management agent, for every sale we have to fill out questionnaires from lending institutions. They always ask if a reserve study has been done and if the association has adequate reserves. Savvy buyers and good real estate agents ask for balance sheets and copies of reserve studies,particularly for older communities. However, more buyers are asking and they are asking about them for newer communities as well. Horror stories on large special/additional assessments abound for communities that did not have reserves and had to replace roofs and/or roads or other expensive infrastructure items. Unlike a single family home, it is difficult to request a lower price to cover those items if they need to be done.

I don't have hard statistics on the matter, but cash in Reserves represents cash behind every front door. More cash in Reserves means more cash behind every door to take care of the common area responsibilities of the association. 
 
The Percent Funded in the Reserve Study will reveal how adequate that cash is, compared to the needs of the association (0-30% weak and high chance of special assessment, 30-70% fair, perhaps some cash flow concerns, over 70% strong), but cash is cash, and it represents value.

Great Questions! If you are selling your Condo in a association with reserves at least 10% of your annual budget which is a FHA requirment for FHA Condo certification, this translates to more buyers. The more buyers, the more competition, and competition is what keeps prices at a higher level.

A reserve fund does not increase the value of a condo. It may make the condo a more attractive purchase, over buying in an assn with no reserve funds. Having an adequate reserve negates the need for special assessments. And, it is one of the factors required to qualify the complex for FHA funding. This is a plus, especially in this depressed market.

The overall financial report is what you really should be concerned with to be sure that no "special assessment" is needed form inadequate funding of the operating AND reserve accounts. As for value, that's driven by market trends, however, if your selling and your associations financials are sound, that could be a strong selling point to the potential buyer.

Think! If you were considering buying a condo and learned it had a low or non-existent reserve fund, would you consider buying in if you couldn't negotiate a substantial discount on the price? 
 
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One of the clearest impacts to property values is a pending special assessment due to inadequate reserves. Another is when deferred maintenance has resulted in a visibly run down property. Another is dissatisfied owners who have been hit by special assessments. So yes, low reserves can and do decrease some property values. What about more typical situations? 
 
Factors that increase the number of potential buyers or that make the property more desirable will tend to increase property values and sale prices. Obstacles to a sale, like a lack of available mortgages, and eliminating savvy buyers will tend to result in lower property values. So reserves are a factor. 
 
Many mortgage lenders will reject a property without adequate reserves. In such a case, appraisers might not even get called, although appraisers are probably aware reserve issues on mortgage applications. Appraisers also look at comparables, so the appraiser will likely find higher sale prices if savvy buyers and savvy sellers considered reserve issues. Similarly, lack of reserve funds may have resulted in lower comparables. So yes, the reserves can impact appraisals. 
 
Here is a quote from RESERVE STUDY GUIDELINES, STATE OF NEVADA, Prepared by The Lied Institute for Real Estate Studies, University of Nevada: 
 
“For potential buyers, understanding the reserve study is an important part of evaluating the value of property within a common-interest community. For association members, an adequately funded reserve account helps maintain property values by making funds available to replace aging components within the common areas. A good reserve study helps owners and potential buyers to form a more accurate and complete picture of a community’s financial strength and market value.” 
 
The state of California RESERVE STUDY GUIDELINES has virtually identical wording. 
 
According to Community Association Institute (CAI) (from realtytimes.com): "adequate reserve funding means more than just providing funds for roof replacements. In the long run it can contribute to the rise and fall of property values. For instance, if an association is in debt or has no reserve fund, educated home buyers may not want to invest in the community."  
 
For some condo sales it may not make a difference, but taking all factors into account, reserves definitely impact sale prices. To put it another way: why not be one of the savvy buyers or sellers?

Please tell me what forumla the state uses to determine the amount of the yearly reserve fund required for a condominium

First, understand the difference between appropriate Reserve contributions and an appropriate Reserve Fund Balance. 
 
Some states require a fraction of the current budget be allocated to Reserves. The FHA wants to see at least 10% of the current budget set aside towards Reserves. Neither is an assurance of adequacy. 
 
National Reserve Study Standards define the formula for how big your Reserve Fund should be (to offset current, existing deterioration). For each Reserve Component, it is simply the fraction of life used up multiplied by the current replacement cost. Do that calculation for each component, and sum for an association total. That is called the Fully Funded Balance (FFB).  
 
Then you compare your actual Reserve balance to the FFB. If your actual Reserve balance is equal to the FFB, the association is 100% Funded. If your actual Reserves are half of the FFB, the association is 50% Funded.  
 
Special assessments and deferred maintenance are common among associations where the actual cash is only a small portion of the deterioration around the association (the FFB). This means special assessments and deferred maintenance are common among associations with a Percent Funded of 0-30%. 
 
See more at http://www.reservestudy.com/frequently-asked-questions

Very good info from Robert Nordlund! 
 
 
 
IMO, if a state wants to regulate reserve funds by statute they should only require that a reserve study be completed and that contributions be made to the reserve fund monthly. To state that x number of dollars or a % of the total budget must be in the reserve is ridiculous -- one size does not fit all. Some assn's have very few items that would be in the reserve study and other assn's are loaded with items and some are very big ticket. My assn has no amenities, i.e. swimming pool,clubhouse, etc; however we have 12 parks/playgrounds and 13 lakes. The lakes especially are very costly to maintain and take up a large portion of our reserve fund. 
 
There are many boards who think a reserve fund is unnecessary; instead they ask for special assessments each time a major repair/replacement is required. These boards do a hugh disservice to their assn. Every assn, no matter the size, should have a reserve fund that monthly contributions are made to.

I am selling my condo in miami and it is in a 13 unit condo complex. 
 
My share of the reserve fund is over $8,000.00 can i negotiate with the new buyer on the 8,000.00?