That’s right, there is a dirty little secret about the “percent funded” based reserve studies. Oops, did I say that out loud? Oh well, here goes. The reason that we are creating a whole new platform for reserve studies and offering conversions of existing “percent funded” reserve studies to the next generation, is because the “percent funded” metric is flawed. It’s a pretty big flaw which causes it to render unreliable results, and limits it’s value. Not to worry though because we at JamesCominSolutions are building a new reserve study application which eradicates this flaw and adds so much additional value! It will be available very soon.
Oh, and yes, I know what you are thinking, “But Jim, you said ‘very soon’ we will be able to eradicate this problem with this new effective method. What will we do now?” Well, right now, we offer a service to convert any current “percent funded” type studies to this new methodology! Yessir, right now! For more on the conversion process, you can click the “More on Conversion Services” button at the end of this page.
But before you click yourself away, let me touch on a few other points about the need for a new generation of reserve studies.
The bottom line for “percent funded” methodology is, not surprisingly the “percent funded” metric. But this outcome is erratic, capricious, and specious. Yep, those are a lot of big words, but they all apply. In simpler terms, this metric is not all that useful, and in fact it is inadvertently deceptive.
You see the primary purpose of a reserve study is to offer a plan, or plans, to pay for the expensive repairs and replacement of an association’s capital components, by setting aside funds for that purpose throughout the years. By doing this, not only are you assured that those funds are there when they are needed for these occasional expenditures, but it also creates equitable funding across the various generations of homeowners in the community. You don’t want to stick the cost of the expensive new roof on those who happen to be owners in year 25 when the roof must be replaced. You want to assess generations of owners for that expense, incrementally and proportionately to the amount of time they owned in the community and “used up” the roof, et al.
The percent funded methodology loses this goal somewhere along the way. You see, in it’s methodology, the outcome of the reserve study presents this metric which is calculated by dividing the amount underfunded (a good start) by the fully funded balance (which is a bad end). The “fully funded balance” is indeed the rascal that ruins the veracity of this metric. It is indeed the part that is erratic, causing the outcome to be capricious and specious. It creates an egregiously flawed outcome.
The amount of the under funding (aka the “deficit”) is properly calculated within a “percent funded” type of study. And it really is the bottom line………almost. See the “almost bottom line” needs a point of comparison to make it relative. For a very large association to be underfunded by $100,000 is no big deal, but for a very small association to be underfunded by $100,000 is a big deal, often a devasting deal. This point of comparison to be applied to the amount of underfunding needs to be a stable number rather than another variable. Most particularly it should not be a variable whose variation is based on the same culprit that we set out to eradicate, the variation in the costs for repair and replacement of capital components from year to year!
I am pretty sure that I have not explained this well enough for each person who is here on this website to say, “Got it! Yes this needs to be fixed!” Most of us in this industry have likely been looking at the incorrect process for many years, so it is hard to see the errors of its ways. We get jaded. It is a bit like trying to balance a checking account and going over it ten times and looking right past the error each time and the more times you look at it, the more correct it looks! So, please watch the presentation below to get a full understanding of the flaw in the current reserve study process. Be patient as it is a bit redundant with what you have just read but will leave you with a better understanding due to it’s visual nature. It does take 20 to 30 minutes, but it’s well worth the time expenditure as changing the world does generally take some time. However, as you are watching, if you feel there is more information than you need on a subject, you can use the forward arrow to move on past some of the pieces that you have already figured out. Also, if you don’t have that much time, you can CLICK HERE to see a simple example of the flaw in the old reserve study process and the value of the next generation!