Reserve Studies – “Buyer Beware”
This article was originally penned by Carson Horton with the HOA Services Group in Beaverton, OR for the Resort Trades Magazine in 2010, but still holds very true today.
When it comes to the subject of reserve studies most people are at a complete loss. Unless you have lived in a condominium or you happen to work in the community management field, it is quite likely you have never heard of a reserve study; and even then, it is entirely possible you may have little or no involvement with reserve planning and budgeting or the reserve study process.
Reserve Studies and Community Management
If you are an owner or manager of a community property reserve studies and the long range planning, which is integral to the reserve study process, are tools which will enhance your ownership experience and improve the effectiveness of your management efforts.
To ensure funds are available for upgrades and capital improvements when needed, Board members request a reserve study. Variations on the theme and the names given to such analysis are many. In the historical context a reserve study was traditionally thought of as a capital replacement budget. Certain types of facilities, such as large rental housing properties, routinely conduct a comprehensive needs assessment which identifies all upcoming expenditures for repairs and improvements, regardless of whether they might be classified as capital or non-capital expenses.
Owners benefit by knowing there is a long range plan for upgrades and improvements, and how the costs are going to impact the maintenance fees for their property. Managers benefit by knowing in advance the money will be available to pay for these expenses when they are incurred; allowing management to plan proactively rather than reacting in a management-by-crisis manner.
Considering the importance of reserve studies and the reserve planning process one might think it is a field which would demand highly qualified, technically proficient practitioners. Unfortunately, quite the opposite tends to be the case.
Because the reserve study business is almost completely unregulated and the barrier for entry into the profession is virtually non-existent, the industry is filled with marginally qualified practitioners offering substandard services. The services of such practitioners generally are offered at deeply discounted prices in an effort to attract clients who might be tempted by the perceived low cost.
Purchasers of reserve study services are, for the most part, on the their own with respect to determining who, among the variety of reserve study providers who populate the industry, is the most appropriate and well qualified vendor for their project. In as much as it is a buyer beware marketplace for those seeking the services of a credible reserve study provider the following caveats are offered to those who may be considering engaging a reserve planning consultant in the near future.
A Little Knowledge is a Dangerous Thing
The reserve study field contains numerous practitioners who possess just enough knowledge to be dangerous; dangerous at least to the pocketbook of the client who purchases reserve study services from such a company or individual. In most instances these practitioners have gained just enough exposure to reserve studies and the industry to be comfortable. Once they realize there is no barrier to entry and the industry is virtually unregulated in all but a few states, suddenly they become reserve study experts almost overnight!
With relatively inexpensive software available which will produce a suitable facsimile of a reserve study, we are once again reminded of the old adage from the information age; “garbage in, garbage out.”
While not all reserve studies prepared with such software applications are substandard, however the relative ease with which anyone may obtain one of these programs and begin producing reserve studies which look, for all intents and purposes like the genuine article, simply makes it that much more likely the field will attract more than its share of less qualified practitioners.
Combined with a few afternoons spent searching the internet for suitable ad copy and technical sounding terms, often pirated from other reserve study providers websites, and just about anyone can put on a somewhat convincing appearance of being a legitimate reserve study practitioner. Unfortunately many of the clients of these firms are unlikely to recognize the difference until long after the bill has been paid.
How to Recognize Qualified Providers & Imposters
So what qualities should you look for in a qualified reserve study consultant and what indicators can you rely on to expose the imposters?
Professional Certifications – As previously discussed the reserve study profession is virtually unregulated and the barrier for entry in the field is extremely low. Professional certifications are offered by two independent organizations; the Community Associations Institute (CAI) and the Association of Professional Reserve Analysts (APRA).
The requirements for obtaining professional certification as a reserve study practitioner from both organizations are very similar, but neither is particularly demanding. Both organizations include a minimum experience requirement, as criteria for obtaining their certification, although it is unclear to what extent applicant provided information is subjected to verification.
The application fees are also similar and not inordinately high, suggesting any individual who decides to enter the reserve study field as an independent practitioner should be expected to possess at least one of these credentials. Considering the qualification standards are at best minimal, and the cost it not prohibitive, it would seem only reasonable to demand that any credible practitioner you may be considering for your next reserve study must be either a CAI certified Reserve Specialist (RS); or an APRA certified Professional Reserve Analyst (PRA).
Anyone who does not possess one of these credentials probably lacks the minimal level of experience required to satisfy the certification requirements; or they are simply too cheap to pay the $500 or so in fees required to apply for certification.
Hire a Specialist
Simply put you should seek out a reserve study provider who is a specialist. If they do not specialize in the business of performing reserve studies not only must you question whether their skills are as well developed as those of a true specialist, but there will always be the lingering question of whether or not they have an ulterior motive, such as securing additional business from your organization. We recently ran across an engineering company that started that “All reserve studies should start with a property engineering study to be effective”. Clearly, this company used its Reserve Study branch to generate engineering revenues, at the expense of their client, which was likely unnecessary.
We live in an age of specialization. If there was ever a professional discipline which is well suited to specialization, it is the reserve study field. This is not a business where it pays to hire a jack-of-all-trades, even for the smallest project. In such circumstances you are probably better off attempting to do your own reserve study; at least that way you won’t be out any money if the results are unsatisfactory.
Experience
When evaluating reserve study practitioners, experience and professional background are probably the two most important standards which may be judged on a more or less objective basis. By experience we are talking about direct experience with the process of conducting reserve studies for common interest associations of one type or another.
Common interest associations, sometimes known as common interest developments or CIDs, include any and all manner of real estate development in which the individual owners share common ownership of certain physical components (or assets) which are appurtenant to the property. When preparing reserve studies for this type of organization it is extremely important the practitioner understand not only the practical steps necessary to conduct a credible reserve study, but also the unique environment in which such organizations operate.
A reserve study practitioner who is expected to offer the highest quality service available must be considered a long term advisor and consultant with respect to the process of planning and executing a long range capital repair and replacement program for their clients; and in this context the term client is assumed to be the entire association membership; not just the Board of Directors, and not the community manager or management company.
To be an effective planning consultant in this situation there is no substitute for experience. For the most part the only way such experience will ever be garnered is through hands-on effort; by this we mean getting down in the trenches and working with clients who have already reached a point where their planning (or lack of planning) has gone wrong. You cannot assume that any specific type of professional background will have prepared an individual for this type of work.
The only true gauge of any reserve study practitioner’s expertise is their direct experience in the field, dealing with clients who have serious issues with their reserve planning process. This type of advisory role is not necessarily going to come cheap, and if this is the type of vendor you are hoping to recruit you should expect to pay a fair price for their services, just as you would any professional; be they an attorney, engineer or similarly regarded practitioner. The good news is that the services of even the best reserve study practitioners, is not likely to cost you anywhere near what most attorneys and engineers might charge for their services.
To determine whether your prospective candidates possess the level of experience you require, it is perfectly reasonable to request a pre-selection interview (often by telephone) to discuss the practitioner’s experience and approach to conducting reserve studies for projects similar to yours. It is also reasonable to ask for a list of client references for which the provider has undertaken similar projects. Keep in mind that a local reserve provider will be familiar with the unique factors that influence component deterioration at your location. Items such a weather patterns, soil conditions and many others should be considered when estimating the life of a component.
Professional Background
Due to the fact that no formal training is required anyone can become a reserve study practitioner. People with prior professional experience in construction, community management, accounting and the architectural/engineering field seem to dominant the field at the present time. While it may be argued that any of these disciplines provides a good knowledge base for becoming a reserve study practitioner, none are uniquely suitable to the field. Regardless of what kind of professional training someone may receive, the important thing to remember is that there is no specific training available for becoming a reserve study provider. As a result the experience issue comes into play once again.
It is reasonable to conclude that the days when reserve studies were assumed to be the work of accountants is gone. Engineers and architects, while they may play an important role in certain instances as a technical consultant, are likely to represent overkill for the majority of reserve study projects. Those with construction backgrounds may seem to be a good fit, particularly if they have a strong estimating background, and former community managers may be unique among those likely to have experience working within the CID environment. A few companies provide a well rounded staff that incorporates several, or all of these backgrounds.
From a practical standpoint if any one background might be the most useful it would probably be that of the construction estimator or real estate specific financial analyst, although it should not be assumed that such an individual is automatically qualified to be a reserve study provider. Certainly engineers and architects possess the technical expertise to analyze the physical condition of your buildings but it should not be assumed that they possess any particular expertise in cost estimating or long range forecasting and financial planning.
One must also question why an individual who is trained as an engineer or architect would be working as a reserve study practitioner, considering their earning power as a reserve study professional is not going to be nearly what it would when working in their chosen field. In many cases such firms will hire someone who possesses less educational background to handle the bulk of the work associated with the reserve study process, while a senior engineer or architect supervises or reviews the project.
What is important is to balance the strengths and weaknesses of the provider. If your top choice was formerly an accountant, how do they compensate for the probable lack of technical expertise? If their strategy is to always insist on hiring a consulting engineer to perform the physical assessment, how does this affect the final cost?
If the provider’s background is in community management what specific qualifications do they possess which make them technically qualified to conduct a physical assessment of the property? Or to develop a realistic replacement cost analysis?
If someone is a trained professional engineer and they are marketing themselves as a reserve study provider, you may want to determine whether they are really in business to conduct reserve studies or are they using this as pretext to develop further business with your organization? (Known as “upselling” or “farming” of an account) If their education and experience affords them the ability to command a much higher professional hourly rate, why would they be doing this? Or are they hiring a less qualified assistant to do most of the work while they oversee the work?
If an individual comes from a construction background you will want to determine whether they have a thorough working knowledge of the analytical aspects of the reserve study process. While they may be the best cost estimator money can buy, if they do not understand the math behind the analysis, then there is a weakness in their skill set.
Again, a company that can provide estimating, financial planning, engineering and management experience is a good choice.
Above all, take the time during the pre-selection process to get to know your prospects. If you are going to develop a successful reserve funding plan over the long term, you need to start by developing a successful relationship with the individual or firm who is going to perform the reserve study and you should be seeking to develop a long term relationship with the vendor.
As with any professional relationship you should expect to pay a fair price to obtain the services of any qualified practitioner. No one is in business to work for free or to earn inadequate pay. You should not attempt to hire a reserve study professional the way you would someone to mow the grass. Obtaining three bids from competing vendors and selecting the lowest bid is a sure way to obtain disappointing results in the vast majority of cases.
There is an old saying among salesmen that if you get something for free, it’s probably worth what you paid for it. Good advice to remember when selecting a reserve study provider.