What is a Reserve Fund for Repairs?

What is the reserve fund for repair of condominiums? Will there be a price increase in the future?

Mortgages aren't the only things you pay monthly after you buy an apartment. After purchase, you will also have to pay a management fee and a reserve for repairs. Moreover, the reserve fund for repairs may be raised, so once it is decided, it will not end. Therefore, in this article, we will explain what the repair fund is used for, and then introduce the market price of the repair fund and the reason why the price increases.

What is a reserve fund for repair?

In the case of a condominium, you have to pay a management fee and a reserve fund for repair in addition to the mortgage each month after purchase. Briefly, the management fee is a monthly fee paid by the resident to the management company for the daily management of common areas. The reserve fund for repairs is for the tenants to save the expenses through the management association in preparation for the maintenance and repair of the condominiums 10 to 20 years in advance. Please refer to the table below for each main use.

Management Fee

Reserve Fund for Repair

・Outsourcing to management company ・Business outsourcing fee to the contracted cleaning company ・Cleaning costs for common areas and waste disposal costs ・Maintenance and inspection costs for shared facilities ・Plant maintenance costs such as entrance and courtyard ・Expendable supplies for common areas (bulb replacement, etc.) ・Electricity and water charges for common areas ・Fire insurance and non-life insurance related to common areas ・Administrative expenses (documents such as general meeting information and resolutions) ・Management association operating costs

・Exterior wall repair work ・Roofing materials and rooftop repair costs ・The cost of repainting the handrail ・Water supply and drainage pipe replacement construction cost ・Cost of replacing the water tank ・ Repair costs for damage caused by natural disasters such as earthquakes and typhoons ・Replacement of common areas such as replacement of collective posts and expansion of parking lots and bicycle parking lots

Accumulation based on a "long-term repair plan" that leads to the property of condominiums

To explain in more detail about reserve fund for repair, in order to carry out the necessary repairs (maintenance of outer walls, repairs of common areas, etc.) to maintain the condominium over a long period of time, it is different from the management cost. In accounting, the thing to be saved is called reserve fund for repair.

What is the market price of the reserve fund for repairs?

Actually, how much is the market price to pay for the monthly reserve fund for repair?
According to the 2013 version of the “Condominium Comprehensive Survey” that the Ministry of Land, Infrastructure, Transport and Tourism regularly surveys, the average management cost in 2013 was 10,661 yen per month, and the average amount of reserves for repairs was monthly 17,83 yen. ​In other words, in addition to the loan repayment amount, you can see that there is an average monthly burden of ¥21,444. By the way, looking at the market price of reserve funds for the 1999 version (1999), the average amount of reserve funds for repairs in 1999 was 7,378 yen. In other words, you can see that the price has risen by more than 30% in the last 15 years.

The reason for the price increase
So why has the price so much increased in 15 years? When repairing condominiums, it is important to perform appropriate repair work in a timely manner in response to deterioration over time of the building. To that end, it is essential to accurately create the aforementioned long-term repair plan and set the amount of reserve for repairs based on it. However, in the past, there was no guideline on how to formulate a long-term repair plan. Therefore, the Ministry of Land, Infrastructure, Transport and Tourism formulated it in 2008. Therefore, the long-term repair plan was reviewed accordingly, and the reserve for repairs was calculated again. In other words, the proper amount of money is being collected.

Repair fund is not the same amount every year

The amount of the reserve fund for repairs is the same every month every year, but that is not the case. It may be worth noting that in some cases it may increase over time. It seems that the longer the building age is, the more likely it is that the reserve fund will increase. When carrying out large-scale repairs, the reserve for repairs is often reviewed as a result of estimating repairs. Large-scale repairs are generally done every 10 to 15 years.
The Ministry of Land, Infrastructure, Transport and Tourism's "Manual on Reconstruction Techniques for Condominiums by Renovation" shows an example of every 12 years, but even in that case, the reserve fund for repairs will be reviewed during large-scale repairs. It may be helpful to refer to it when purchasing.

5 Reasons Why Repair Reserve Funds Go Up

Let's take a closer look at why reserve fund for repair might go up.

The initial set amount is low
The first reason is that the initial amount of reserves for repairs at the time of sale is low. Especially in the case of second-hand condominiums before the creation of the guidelines, it is highly possible that the initial set price is set lower than the appropriate amount, and as a result, the price will rise in the future.

Step-up accumulation method with fixed price increase
The second is when raising the reserve fund for repair price is a fixed collection method. There are two reserve fund reserve methods: the "equal fund reserve method" and the "staged increase fund reserve method." The equal fund method is a method of dividing required repair money by the planning period and paying the same amount every month. Therefore, the reserve fund for repairs will not change during the period. However, many condominiums use the latter method of gradually increasing reserves, and the reserve fund gradually increases in price. It is important to check carefully as you will be informed of the payment at the time of purchase.

Market prices for repairs are rising
The third is when the market for repair costs rises and the reserve fund for repairs rises accordingly. There is a concern that the workforce will decrease due to the aging of the population, and there will be a shortage of labor for construction workers, and such a shortage of labor will lead to soaring labor costs, resulting in higher repair costs.

Implementation of large-scale repairs not originally planned
Fourth, there are large-scale repairs that are not planned. When the building age has passed, the equipment, etc. will become old, so it is necessary to carry out large-scale repairs. Barrier-free construction and upgrade construction are not included in the long-term repair plan, and there is no reserve fund, so owners have no choice but to raise the price.
Fifth, the cost is high because owners left everything to the management company. As a result of these factors, the fund for funded reserves continues to rise.

Timing of price increase
Now that we know the reason for the price increase, we would like to touch on the timing of price increases. The timing of price increase basically depends on which method is used to accumulate. It seems that the timing for raising the price with the equal fund reserve method is often after the completion of large-scale repairs. It can be predicted that the cost was higher than the estimate at the time of planning. In case of staged increase fund reserve method, the timing of price increase comes every few years. It is necessary for owners to be informed of this when you purchase the condominium and schedule it yourself.

Summary

When purchasing a condominium, understanding the significance of the reserve fund for repairs and why the price will rise will change the criteria for choosing a condominium. Check whether the amount of the reserve for repairs will increase significantly or moderately, check the age of the building, and prepare in advance.
Please contact us for consultation on purchasing or selling real estate.