hoa budgeting process

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 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 HOA 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 boards find it difficult to come up with a sound HOA 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

Part of HOA budget best practices is checking the governing documents. These will clearly outline the HOA budgeting process as well as the scope of legal authority the board has. They 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

HOA Budget CommitteeWhile 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 HOA budget preparation. 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 the annual homeowners association budget 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 HOA budget guidelines should always include accounting for the reserve fund. This 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

hoa budget best practicesEvery 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 Future Budgets

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.

Ideally, associations should also have a 3- or 5-year financial plan in mind. This way, they can reflect the plans in the current annual budget. For instance, the association may have a large project coming up. To fund it, the board can set a budget each year to cover the cost of the planned project.


11. Put the Community First

The board has a fiduciary duty to put the community’s needs first. As such, they should reflect this duty in the community budget. The board should always think about which expenses would improve the residents’ lifestyle and meet their needs. They should think of the community’s short and long-term needs and prioritize upkeep and capital improvements. Boards should never make HOA budgeting decisions based only on personal interests.


12. Handle Delinquent Accounts

Every HOA will have delinquent accounts. Hence, the board must anticipate these in the coming year and budget for them. Consider including them as a “bad debt expense” in the financial plan. This will ensure the association’s financial stability in case homeowners fail to pay their dues.


13. Be Conservative

To get HOA budgeting right, boards should stay conservative in their projections. Expenses can be unpredictable and impossible to plan no matter how much analysis you do. Hence, it’s best to keep the following mindsets:

  • Expect to only collect income from HOA fees
  • Base every expense on present economic conditions
  • Leftover funds from operations must account for 10-20% of the annual dues


14. Reduce Costs Where You Can

HOA budgeting is all about spending money wisely. If possible, the board should look for ways to reduce the association’s costs. For example, the HOA can conduct an insurance evaluation to make sure they’re only paying for necessary insurance. This also helps the association address minor maintenance issues before they become larger ones that cost more money.

Furthermore, the board should keep water conservation and energy efficiency in mind. They should replace old, inefficient equipment with more energy-efficient ones. This may come at an immediate cost but it will save the HOA from paying long-term maintenance fees.


15. Seek Professional Help

Consider asking accountants, reserve study companies, and financial experts when drafting the budget. These industry professionals can offer invaluable input to communities. They may point out things the board has missed and ensures that the budget is based on accurate assessments and estimates.


16. Use Technology

HOA management software or accounting software can significantly reduce the board’s workload when it comes to budgeting. Technology is also more reliable as it does not make human errors. Moreover, software streamlines the process and allows the board to forecast future income and expenditures, track operating costs, and generate reports more easily. They can make budgeting decisions without getting lost in the minutiae of accounting and crunching numbers.


17. Track and Adjust

The HOA should regularly track its finances to ensure it’s still in line with the budget. Compare the actual income and expenses to the budget and adjust as necessary to stay on course.


18. Adjust to Changing Needs

Communities change over time and the HOA budget should reflect that. Make sure to account for changing needs such as new infrastructure or amenity replacements. Regularly assess the budget and be ready to reallocate some funds according to homeowner suggestions.


19. Keep Accurate Records

The budget relies on past data to forecast future income and expenses which determine the budget. But, how can the community do this if records are incomplete or inaccurate? Make sure that the HOA treasurer is doing their job properly to ensure there are no errors or missed opportunities for savings. The community can hire a professional accountant or use accounting software to ensure accurate record-keeping.


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.

Clark Simson Miller offers expert financial management services, including annual budget preparation. Call us today at 865.315.7505 or contact us online to learn more!