Proper HOA budgeting is an association’s first defense against financial trouble. When an HOA has a clear and specific game plan, operations flow much smoother. Unfortunately, not all board members know how to budget for their HOA community. Several factors are to consider and some key actions that may get overlooked.
What Is an HOA Budget?
An HOA budget is precisely what it sounds like — a financial plan for an HOA that encompasses a specific and limited period. It includes all the anticipated expenses for an association. Most budgets cover a year, though some can also be on a month-to-month basis. From the homeowners association budget, the board can compute how much each homeowner will pay in regular dues.
Best Practices to Use for HOA Budgeting
Many HOA boards find it difficult to come up with a sound budget. Considering the crucial role the budget plays in an HOA’s financial health, it is not something a board can leave to fate. Budgeting takes time and research, and there are certain things the board should do.
Here are the HOA budget best practices that every association should use.
1. Check the Governing Documents
An association’s governing documents will clearly outline the HOA budgeting process as well as the scope of legal authority the board has. These documents will also iterate the HOA’s maintenance obligations, which should inform what vendors the board must hire. Since the CC&Rs and bylaws can be fairly complicated and comprehensive, it is a good idea to draft a summary containing specific budgeting requirements.
2. Rely on a Budget Committee
While the HOA board is primarily responsible for budgeting, it can establish a committee to provide assistance. Of course, this is under the assumption that the HOA’s documents permit the creation of committees in the first place.
A budget committee generally consists of volunteer homeowners, with the board treasurer acting as the head. The board president and HOA manager can also offer guidance. When choosing committee members, it is important to consider time commitments. Members should also work well with others, be open to input, and have an eye for details. Other than that, a background in finance or budgeting is a good bonus.
A budget committee should schedule its meetings wisely. It is best to set aside an entire day to talk about the budget. That way, members can work without any distractions or interruptions. It is also imperative to start the HOA budgeting process early on. This will give the committee ample time to conduct research, talk to vendors, obtain input from owners, and ratify the budget.
3. Separate by Categories
Organization is a vital feature of a well-produced budget. Simply writing down the anticipated expenses for the year is not enough. It is important to separate line items into major categories: budgeted revenue, budgeted expenses, and reserve fund contributions.
The budgeted revenue is the income that the association expects to receive. This mainly stems from regular dues and assessments. If an HOA rents out its common areas, rental income will also fall under this category.
The budgeted expenses should be further separated into sub-categories: administrative expenses, operating expenses, and fixed costs. Administrative expenses refer to expenses associated with back-office administration, such as legal fees, management fees, and office supplies. Operating expenses cover maintenance costs, utilities, and the like. Fixed costs are those that don’t vary much, such as federal income taxes, insurance, and property taxes.
Finally, reserve fund contributions are fees that go directly to the association’s reserves. The reserve fund is used to pay for future major repairs and replacements of assets or components. It is essential to the long-term functionality and financial stability of the association.
4. Use Historical Data as a Guide
To plan for the future, it is important to look to the past. That means reviewing the association’s past financial records, including past income statements and budgets. Compare how previous budgets matched the actual expenses of past years. Creating a spreadsheet that reflects such data will help boards identify budgetary gaps, the cause of these gaps, and which line items are more volatile. This way, boards can plan annual budgets more accurately.
5. Anticipate Future Costs
While past records can help boards immensely, they should not discount future costs. Prices can change over time, which is why boards should anticipate increases.
To do this, boards should check current vendor contracts to determine which ones are up for renewal. Renewing a contract usually means renegotiating fees, and vendors may raise their prices. The same goes for insurance policies and utility companies. If rates become too high for the HOA, the board should be prepared to send out new RFPs to potential vendors.
6. Consider External Economic Factors
When it comes to HOA budgeting, it is equally important to consider factors outside of the board’s control. These include economic factors such as inflation, rising cost of goods and materials, and higher labor costs. More often than not, boards will see an increase in insurance premiums as well as professional services.
7. Review the Reserve Study
The reserve fund can shield an association from sudden expenses resulting from the breakdown or deterioration of assets. As such, it is imperative to keep an HOA’s reserves appropriately funded.
One tool that can help an association determine its optimal reserve fund level is a reserve study. A reserve study lets the board know how much it needs to have in its reserves at any given time. It also comes with a multi-year plan for contributions. Following this plan and ensuring timely contributions will keep the association green.
8. Be Transparent
Every HOA board should practice complete budget transparency. Boards should present the budget to homeowners for review and feedback. It is also good to host meetings to discuss the budget and ask owners what is lacking in the community. Perhaps there is a greater need for maintenance than the board anticipated.
Practicing transparency is a surefire way to build trust within the community. Homeowners pay dues to the association, so it is only natural for them to want to know where those dues go. When the board keeps owners in the loop, there is less room for suspicion and distrust.
9. Comply With State Laws
In some states, homeowners associations must follow a specific procedure or requirement when planning a budget. For instance, in North Carolina, HOAs and condominiums must hold a budget ratification meeting 30 days after adopting a budget.
There may also be laws regarding dues increases. After planning a budget, some boards find that they will need to raise dues to meet the anticipated expenses for the year. However, some states limit how much associations can raise dues without a vote from the membership. One example that comes to mind is Arizona, where HOAs can’t increase dues by more than 20% without approval.
10. Get a Head Start on Next Year’s Budget
The HOA budgeting process does not stop after adopting the budget and collecting dues. A good HOA board should keep track of income and expenses to ensure the association stays within the budget. Consistent monitoring will help keep the HOA healthy and give the board a head start for the following year.
Everybody Needs a Little Help
HOA budgeting can be a long and arduous journey for an inexperienced board. However, the right attitude and a list of the best budgeting practices make the process more bearable. Of course, receiving guidance from trained professionals is still the best way to go.
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