Top 13 Budgeting Mistakes Self-Managed Boards Make
Planning the right budget for the community is crucial in making sure the homeowner’s association is not underfunded. However, when the HOA is run by a self-managed board who are not financial experts, financial issues may unfold. Poor budget planning can cause serious conflicts between the HOA board members and homeowners, which is the last thing the HOA management wants to happen. For those who have self-managed boards, here are the budgeting mistakes to watch out for and avoid at all cost:
1. Planning Without Considering Inflation
One of the most common budgeting mistakes self-managed boards make is yielding to the demand of homeowners which is not increasing the association’s fees. When this happens, the HOA board is forced to forego essential maintenance and repairs due to the lack of budget.
While not increasing the HOA fees is convenient for homeowners, the HOA board must take inflation into account and prioritize the welfare of the community, even if it means increasing the fees. If prices of consumer goods and services rise every year, then it shouldn’t be hard to explain why HOA fees merit an increase as well.
2. Does Not Take into Account Bad Debt/Unpaid Dues
When making budget projections, the HOA self-managed board should not neglect to include the HOA’s current bad debts and unpaid dues. If they do not take these into account, it can lead to underfunding the budget for next year as the HOA will be under the impression that they don’t have other obligations to pay off.
3. Poor Fees Collection Process
An HOA with a poor fee or assessment collection process can negatively affect the community’s budget. The HOA board uses these fees to meet the financial obligations of the community association. These are the same fees the board uses for the upkeep of the common areas. If the HOA is having a hard time collecting the assessments and there are plenty of arrears, this can lead to underfunding the budget wherein the HOA will not have the necessary funds to carry out all their financial obligations.
4. Underfunding the Reserve Funds
Touching upon the previous point, proper funding of the reserve fund will also require the proper collection of regular assessments and fees. Part of the assessment goes to the reserve fund, which is where the funds for the maintenance, repair, restoration, and replacement of common area components come from. Some examples of these are repainting, replacing and maintaining the landscape, maintaining pool, courts, and clubhouse, to name a few.
If the community association has an underfunded reserve fund, the HOA board can either set aside the critical repairs and maintenance needed or will dip into other sources of funds to pay for these repairs instead.
Homeowners need to understand how important the reserve funds are. Emergency expenses are also taken out of the reserve fund, like repairs from an earthquake or a hurricane. The reserve fund must be maintained yearly. If you’re unsure how much reserve fund your association needs, you need to get a reserve study done.
5. Does Not Take into Account Foreclosures
Foreclosures are unexpected most of the time, making it all the more important to include it when budget planning. Even though there is a property lien in place, the community association has to wait to be able to collect the assessments. If a specific homeowner’s assessments were already counted in the budget, and suddenly, that property was foreclosed, this can already affect the HOA budget negatively. What more if there are several foreclosures in a year?
6. Not Accounting Every Single Expense
Even if your community has an excellent assessment collection system with more than 90% of homeowners paying their dues, the community’s finances can still go downhill if it’s mismanaged. Budgeting and financial management go hand-in-hand, which is why it is essential to account for every expense made by the HOA. This way, when it’s time to start planning for the budget, there is a complete list of expenses to consider so the HOA can avoid underfunding the budget for next year.
7. Forgetting About Insurance
When natural disaster strikes and the HOA isn’t prepared for it financially, the association’s budget will take a big hit. The HOA needs to plan and find the best insurance coverage for the community. That said, the HOA board must also include the insurance payments when planning for the budget. Nothing beats being prepared!
8. Not Planning for Changing Rates
We’ve briefly mentioned inflation earlier, but here, the focus is on the industries that change rates dramatically every year. The two industries that should always be part of the budget planning are the utilities and insurance industry. For utilities, this includes water, garbage, natural gas, electricity, and sewer.
As for insurance, the HOA board should do its homework in finding the best insurance plan for the community. In the last few years, insurance payments have increased by 30% to 60%, which is why the HOA board should only get the coverage needed. Another thing to consider is to go for renewable insurance contracts than the ones that lapse in a year. These non-renewable contracts are usually priced 300% more.
Not planning for these changing rates may force the HOA to get funds from the reserves, and it all goes downhill from there. The HOA board must budget for a miscellaneous contingency that will cover unexpected operating expenses.
9. Forgetting to Include Surprise Expenses
Surprise expenses or expenditures are precisely that—unexpected expenses that the HOA has to pay for. Not taking these into account will cause underfunding the HOA budget, which can only lead to financial disaster for the community. What are some of these surprise expenses?
Plumbing or electrical emergencies
Property tax increase
Insect infestation damages
Resurfacing of roads, sidewalk, parking lots
Extra security and precautionary measures needed after a robbery
Training for HOA board members, security personnel, and maintenance crew
Opportunities to buy new equipment that can increase water or energy efficiency
10. Failing to Compare Financial Reports
The financial reports from the past three years are always a good basis for budget planning. It helps to compare the past budget projections versus the actual costs.
Apart from the profits and losses, the HOA board should also look into the delinquency percentage among homeowners who are not paying the dues; it should be less than 5%. The HOA board must also check the extra operating funds, which should be 10%-20% of the annual assessment. Further, the past reserve funds should also be taken into account.
11. Not Going for Local Suppliers
Going for local suppliers eliminates the need to spend money on travel expenses as well as expensive shipping fees. If in the previous years, the HOA has been shopping locally and then the HOA decides to change their approach to shopping this year, those travel and shipping fees will not be accounted for in the budget, which, again, can affect the HOA budget.
12. Declaring Costs and Expenses Lower Than They Should
When planning for a budget, it’s better to add to the amount of the expense rather than declaring a lower value. It’s always better to have extra than have a lack of funds at the end of the day. Moreover, this also touches upon how the HOA board looks at expenses.
For instance, if the HOA board wants to go for cheaper maintenance jobs to save money, then that’s the expense they will write off. The problem happens when the low-quality job results in more damage and repairs, which are expenses that the HOA board wasn’t prepared for.
13. Not Computing the New Homeowner Fees
We started this list with considering inflation on homeowner fees, now, it’s time to do the actual computation. The HOA board must compute the homeowner fees to be able to plan out a budget as accurately and realistically as possible. The formula is:
Operating Expenses + Annual Reserve Contributions = Homeowner Fees
Homeowner fees/All homeowners = Fee per homeowner
After getting your numbers, compare them to the homeowner fee last year. If the fee is close, then that’s a good indication that you’re on the right track. On the other hand, if the fees are very far from each other, then the HOA board needs to start re-evaluating their expenses.
HOA budget planning is far from easy, but it is one of the most important responsibilities of the HOA board. There are no cutting corners with the budget, which is why every single expense (expected and unexpected) needs to be accounted for. Let the budgeting mistakes above serve as a reminder of what your self-managed HOA board should not forget to include when planning for the budget to ensure the association’s financial stability and strong financial health in the coming year.
Clark Simson Miller Can Help You Manage Your HOA Budget
HOA budget planning can be overwhelming work for the self-managed HOA board members, which is why the experts over at Clark Simson Miller lend a hand when it comes to HOA financial management. CSM also offers collection services and insurance that will be helpful in effective budget planning. If you want to talk to one of the CSM professionals, send an email to firstname.lastname@example.org. For a free quote, give us a call at ((865) 315-7505 or contact us online!