Consequences of Failing to Obtain Reserve Studies
California law and most CC&Rs require associations with common areas to obtain a Reserve Study every three years and to update the report every year. The most common consequences of not obtaining reserve studies are as follows:
- Failing to obtain reserve studies is a clear violation of California law which makes the board legally negligent in performing its duty to the association and each of its members. Such negligence can result in liability for the association and the membership as described below.
- When associations fail to obtain reserve studies, financial statements of the association are not accurate. In fact they may be greatly misleading to members of the association, new buyers, and lenders, creating a liability for the association and possibly the members of the board.
- When associations fail to obtain reserve studies, surprise special assessments become highly likely which reflects very poorly on the board while increasing the potential liability of the association.
- Lenders will often refrain from making the most attractive loan products available to owners and buyers of homes in common interest developments that don’t obtain reserve studies where surprise special assessments are likely to be imposed on owners. The Veterans Administration (VA) and the Federal Housing Administration (FHA) are likely to reject associations that have failed to obtain reserve studies as required by law. This means VA loans and FHA loans become unavailable to buyers and owners wanting to refinance.
- Knowledgeable real estate agents and buyers of homes often steer away from properties in associations that don’t have budgets based on reserve studies and have boards that are not concerned about violating the law. Even when buyers decide to make an offer to buy, they are often lowered because of the uncertainty created by not having a reliable budget.
- Inaccurate budgets often lead to deferred maintenance and higher overall property expenses because deferred maintenance nearly always results in increased and unnecessary deterioration, water damage, and maintenance expenses that could have been avoided.
- Large special assessments that owners have difficulty paying lead to collection problems that could have been avoided with proper budgeting.
- More recent buyers, who are forced to pay special assessments, are likely to complain that they are paying money that earlier owners should have paid if the assessments had been based on a proper budget. This can potentially lead to litigation, but it always results in unfairness.
The California legislature has created many laws that are poorly written and unnecessary. The law concerning reserve studies does not fall into these categories. The law makes a great deal of sense and every board is advised to follow the law.
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