Most board members know that the process of planning an HOA budget is basically the opposite of traditional household budget planning. Instead of starting with your income first and then planning for expenses, a homeowners association must estimate costs first and then determine their revenue source, most of which is made up of HOA homeowner fees.
On the other hand, some HOA boards will try to determine resident fees first in an attempt to keep them low. However, this process can be tricky and usually leads to under-budgeting, which then causes shortfalls in the budget for the next year. Worse yet, it can force your board to use reserve funds—which should only be used for HOA replacements and repairs—or end up increasing special assessments for homeowners. You might even be forced to put off important maintenance for association needs.
The good news is that you can avoid having these problems by planning ahead of time and understand the following three basic HOA accounting concepts.
Maintaining Your Reserve Fund
Contributing to a reserve fund is so very important for any homeowners association for a few main reasons:
HOA fees and assessments: When you have a reserve fund set up for replacements and repairs in your association, it prevents you from having to raise special assessments or homeowner fees to cover the costs of those repairs—which will inevitably need to happen over time.
Long-term planning: Your board will also be able to set up a long-term plan to follow when there are reserve funds available for future maintenance needs. For example, all HOAs will have times when regular maintenance is a necessity, such as roof repairs, equipment replacements, or safety upkeep of amenities. But when you have a reserve fund in place, you can be prepared to take care of those factors without missing a beat.
If you’re unsure about how to set up a reserve fund or determine the amount of contribution to make to it, you might want to work with a HOA management company or conduct a reserve study. The most important point is that if you haven’t already set up a reserve fund, the time to get started with one is now.
Examining Previous Expenses
Take a close look at each line item cost in your HOA’s budget within the past three years. Pay attention and note any trends that you see, especially if you hadn’t previously noticed them. This will help in considering changes to make to your operating budget in the future.
Determining HOA Fees
Make sure all board members understand the following basic equation for determining how much HOA fees should actually be:
Take your Total Operating Expenses plus the Annual Reserve Contribution, then divide by the percentage of ownership.
That number is what should be your average HOA fee. (Depending on the governing documents for your association, the percentage of ownership can be also divide equally.) Then, examine the number you get. Is it the same or close to the same as what you charged last year? If so, that’s a good sign for your budget. If not, it’s time to meet with your HOA board about making revisions to your fees and budget.
These basic account measures can work wonders for your HOA’s accounting and budget organization. Get started today by looking over your budget for the last year with these important points as a guide.