g The component list in a reserve study is the foundation of the rest of the study; when it’s not accurate the rest of the study will suffer; everything from percent funded figures to funding models to recommendations and timelines of projects will just simply not be accurate or reliable to base budgeting decisions on. This is an area where quality, experience and a yearning to learn count. Let’s look at a real life scenario of what can happen when a component list is not accurate:
Real Life Scenario
We were hired to complete a Level I Full Reserve Study for a 7 acre, twenty unit condominium association in an unincorporated area. The community consisted of 10 duplex style homes and the Association maintained all exteriors, the roads, the site and fencing, etc. Upon our arrival we noticed numerous very obvious septic tanks lids on site – not typical of multifamily properties but this being an area outside the city limits was not surprising.
After sitting down with members of the Board and discussing the community and common area to be included in the reserve study we were provided a past in house DIY “reserve study” that they felt may not be as accurate as it could be. Upon our quick review of the component list in the study we asked about the septic tanks and drain fields in the community which were absent from the prior study but were very obvious just from our drive in. None of the Board members were aware of the expenses related to the replacement of these systems and since their community was already 26 years old we noted they really should have been budgeting for, at a bare minimum of drain field failures, if not full replacement of the whole system.
We were then told that each duplex had a shared septic tank, shared leach/drain field and the systems were complex with several tanks and pumps as each was built on small lot areas. A total of 10 systems on the 7 acre parcel – at our initial estimate these systems would cost at a very low end of $20,000-$30,000 per system to replace; $200,000 to $300,000 in project costs which the Association had never been budgeting for or was apparently aware of. To make matters worse there had been significant landscaping over all the drain fields (gardens, trees, hardscapes) and Unit Owners had constructed large decks over many of the septic tanks. Much of this would need to be removed in order to replace these systems – an additional cost on top of the septic system replacement project.
One of the Board members stated a couple years ago the county had offered the community to hook up to a sewer line that was being installed for a nearby development that was about to be built. They had chosen not to do this as they were given of bid of around $100,000, a cost the community members found to be much too high to incur especially since they had a the current systems which were very inexpensive to maintain. Had they known of the real expenses related to the inevitable replacement of the septic systems they most likely would have jumped at the chance as the $100,000 bid, while expensive, was a great deal compared to a $200,000-$300,000+ project that will be looming in their near future. Since the initial offer to hook up to the public sewer lines, roads had been installed and homes constructed in this neighboring community; hooking up to this sewer line would be much more expensive and may not even be possible any longer (no utility easement).
So the question is, had they known about the septic system costs and typical useful life of these septic systems would they have made a better budgeting decisions. This prior “study” completely omitted this common area component expense – by far the largest line item component expense in the community and one which was fast approaching reality. My bet is that they would have had some very difficult discussions at numerous HOA and Board meetings but they would have inevitably made sure to connect to that sewer line – it was just too good of an opportunity.
Quality and Experience Counts…
What should have been an extremely helpful document for them to utilize has turned out to be nothing more than a best case scenario of wishful thinking (upon a more in depth review many large expenses were missing). They are now in a position of trying to figure out a way to pay for these septic systems over time and as they fail – which they absolutely will. Some will likely last 30 years others may last 40+ years but all will eventually need replacement and the time to budget for their replacement was 26 years ago when the community was new and the amount needing to be set aside would have been comparable to a monthly sewer bill. Now they are looking at numerous, inevitable, large special assessments. The longer the systems last the more expensive the removal & installation will be too (remember inflation), just pushing it off for someone else to figure out later is just Kicking to Can Up the Hill (hill of costs).
The above real life scenario is not uncommon even though theirs happened to be an uncommon septic system budgeting issue. We typically surprise Boards with “unexpected” expenses related to asphalt roads, waste & roof drain lines, mechanical system replacement/upgrades, underground irrigation piping replacement, pond liners, pool piping replacement & corresponding pool deck replacement, etc. Components which are very costs and typically out of sight are often overlooked by Boards and Community Members – but the project expenses will occur nonetheless. The above community likely saved a couple of thousand dollars by completing an in-house DIY reserve study but the cost to them was dramatically higher in that they missed their opportunity to budget for these expenses in a much more cost effective manner over a long period of time and secondly missed an excellent opportunity to hook up to the city sewer lines; a no brainer if they were aware of the significantly higher expense related to these septic systems.
DIY Reserve Studies
I’m not against in-house DIY reserve studies as I strongly feel that anyone can complete a reserve study with the experience, knowledge, tools and desire to learn. What has taken our reserve analysts years to learn and become experts in is not brain surgery but it is an industry which is always changing and evolving which requires a wide degree of knowledge and most importantly a strong desire to learn more. There are many variations of DIY reserve study software but all are based on the component list being accurate and reliable. Just plugging in some numbers will often shoot out a nice looking report – but all that glitters is not necessary gold. If the components, costs, useful life expectancies, remaining useful life expectancies are not accurate then you will have a nice looking document that is completing inaccurate and could very well result in a similar scenario to the above community. Whether the reserve study is done in house or completed by a reserve study professional it is extremely important that the foundation of the study – the component list – is comprehensive and accurate.
