There are three key items that determine the success of any HOA: communication, management, and money. In this article, we will focus on the last point.
While HOAs may hire professionals to help them manage the association’s finances, it is ultimately up to the board to make sure the HOA is in good financial health. Boards work hard to ensure there is enough money available to keep the development clean and safe, but many of these volunteers don’t have experience working with such a large and complex budget. From assessing current expenses, to analyzing historical data, to making realistic projections, there is a lot that goes into managing a budget, and there is little room for error.
A small mistake could end up costing the HOA thousands of dollars. Since there is so much at stake, new or inexperienced members are strongly encouraged to hire an accountant or HOA management company that can provide a custom financial management package.
Regardless of how experienced your board is, the budget tips listed below can help shift your budgeting practices from good to great.
Follow the rules
Don’t be tempted to take shortcuts or engage in activity that falls into a gray area. For example, it is possible to invest HOA reserve funds to generate more wealth for the community, but this can be a risky move, even if the association is legally allowed to do so. Make sure the HOA closely follows state laws and governing documents. Similarly, make sure that proper internal controls exist so that funds cannot be misappropriated or wasted.
Expect and plan for increasing expenses
The cost of livings seems to increase every year. Remember how inexpensive groceries, trips or personal care services were two decades ago? Expenses go up, and HOA expenses are no different. There are many costs, including landscaping services, pool maintenance, electricity and even materials like timber or paint, that will inevitably go up. Make sure to anticipate those increased expenses when it comes to utilities and vendor services. It’s wise to factor in the accounting, legal, and insurance services that you rely on, as well. When budgeting, if possible, leave a little wiggle room for projects or expenses that end up costing more. It’s rare for things to cost less than you planned for, but going over budget is not at all uncommon.
Keep accurate reports, and use them to your advantage
Money is always moving in an HOA community. Bills need to be paid, owners need to cover their dues and expenses, and staff need to be compensated. Even though it’s a lot, it’s important to keep track of every cent. There are a couple of smart options to help the association do this. It is recommended that HOAs move away from cash and cheques in favor of credit cards or other electronic payment methods. This way, there is always a paper trail to refer to. If you forget to document a transaction, you can refer to the bank records or credit card statements.
Accounting software will also make budgeting a lot easier for HOAs. Some programs are designed specifically for associations, which means data management becomes a lot more intuitive. Automating this process reduces the margin for error, and saves the board time. Plus, since the numbers are all in one place, you can often isolate certain data so you can make educated decisions about spending and budgeting.
Prioritize your projects
There is always something that could be renovated or upgraded in an HOA community. As such, the board must prioritize projects so that the most serious or important items are addressed in time. Anything that could be harmful to residents or to the property, or leave the association vulnerable to litigation (tripping hazards, water damage, sinkholes, hanging tree branches) should be repaired first.
Not only does this ensure there is money available for the items that need immediate attention, but it can help prevent more significant maintenance or repair issues. More importantly, the board is far less likely to issue special assessments if it can confidently identify and pay for the most pressing issues first.
Assessing projects is far easier if your reserve study is up-to-date. A reserve study helps the HOA determine how much money owners need to contribute in order to ensure the reserve fund has an adequate amount of money available, as well as when components will need to be repaired. Most experts say a reserve study should be conducted every three years. Studies should be conducted about five months before the beginning of a new budget year.
Negotiate with vendors for better prices
Devote time each year to reviewing vendor contracts. If your community is large, or you’ve been working with the same vendor for many years, they may be able to offer the HOA some type of incentive pricing. For example, you may receive discounted maintenance rates or replacement parts. However, if you don’t ask, the vendor probably won’t extend any special perks to the community; they will assume you are happy with the current contract.
The board is encouraged to negotiate better prices, but HOA managers are definitely the experts in this area. They have long-term relationships with many vendors, and may have the ability to secure services at a more competitive price. The money saved can be used for other things that will help make the HOA a great community to live in.
Consider what is best for the community
This sounds like common sense, but it can also be easy to forget. The board should always put the community’s needs first, and any decisions regarding the HOA budget should reflect that. Pressure from individual members, or personal interests, should not influence financial decisions. For example, no owner will be happy about an increase in monthly HOA fees/dues. However, increases will be necessary in order to keep up with price increase and replenish the reserve fund. Even though raising dues is not a popular decision, it is usually the correct one because it will benefit the HOA as a whole.
A budget based on factual data can help maintain an HOA community’s health and happiness for years to come. Budgeting is a complex process, but it is important that every HOA board gives this task the attention and care it needs. Unfortunately, a community won’t be able to balance the budget without careful planning. It’s easy to overspend, but doing this leads to additional problems and tough decisions that impact the entire community.
It is ultimately up to the HOA board to manage finances, but it never hurts to get help. HOA management companies, accountants and even HOA accounting software can make the budgeting process less stressful, and help ensure the community has the money it needs to operate efficiently.