B.D. from Beaufort County, South Carolina writes:
Dear Mister Condo,
Should my HOA commission a rebuild estimate every five years? What proportion of the rebuild estimate should be insured? For example: if the rebuild estimate is $20 million and the insurance limit is $16 million is this enough? If an engineer survey of the structure reveals defects and the HOA has them rectified, should the insurer approve the survey and the rectifying measures?
Mister Condo replies:
B.D., most condos and HOAs use a tool called a Reserve Study to help assure that they are saving enough money to rebuild and replace the common elements as they wear. A rebuild estimate sounds similar but it is not common for buildings, roads, fences, pools, etc. to be rebuilt. They must be maintained and a Reserve Study will provide answers as to how much money should be set aside each year to keep the association in good financial shape for when those common elements need to be replaced. Typically, once a Reserve Study is commissioned, the condo or HOA can request and update to the study from their Reserve Study provider. 5 years may be a good number to shoot for but it could be as frequent as every year or every other year. Additionally, in a year as we are having now, when inflation is driving prices way up, getting an update this year or next may be a particularly good idea. Either way, collecting the money and placing it in insured investment accounts is a best practice. An engineer can give you physical building but you will likely wish to consult with Reserve Study specialist (they carry the designation RS after their job title) to discuss the best financial strategy. All the best!