It is the duty of the homeowners association board to prepare the budget from which dues are calculated. But, there are external economic factors you must consider beyond just the needs of the community. Here, we take a look at the relationship between HOA dues and inflation.
A Positive Correlation Between HOA Dues and Inflation
To understand how inflation affects HOA dues, it is first important to know how these associations work. Homeowners associations are responsible for maintaining the community. This involves purchasing materials and hiring vendors to perform the various tasks needed to keep the community in order. To pay for these goods and services, HOAs must turn to their primary source of income: homeowners.
When a homeowner joins an HOA, which is often mandatory, they agree to pay monthly or annual dues. The dollar amount of these dues can change over time as the needs of the association also change. But, what happens when inflation rates rise?
The explanation is simple. As the cost of goods goes up, so do vendor rates. Vendors do this so that they don’t end up with a net loss. Of course, this also means that homeowners associations have to face more expensive rates. And, HOA boards can use one of two ways to accommodate this change — adjust the budget or cut costs.
HOA Dues and Inflation: Adjusting the Budget
When an association is met with added or increased expenses, it has to respond by increasing the HOA dues. After all, the association has nowhere else to source the money to make up for the deficit.
When adjusting the budget, it is important to look at all aspects and line items. Inflation can affect everything, even the cost of copy paper. Before renewing your contracts with vendors, inquire about any price hikes they’re planning to impose. Then, evaluate whether or not your budget can take the increase. If not, it may be time to look for a different vendor. Keep in mind, though, that other vendors will likely raise their prices to keep up with inflation, too.
Increasing HOA dues because of inflation is often necessary. But, don’t expect homeowners to react positively to the change.
HOA Dues and Inflation: Cutting Costs
Obviously, there is a correlation between inflation and HOA budget planning. But, if your board feels like it can’t increase the budget, the only other option is to cut down on your expenses. This is a slippery slope, though, as cutting too many expenses — particularly the essential ones — can result in a lack of upkeep and maintenance. Some examples of essential expenses include insurance, cleaning costs, and utilities.
More often than not, the best way to cope with inflation is to adopt a combination of these two options. Evaluate what expenses are essential and what aren’t. Keep the essential expenses and adjust your budget accordingly. As for the non-urgent expenses, postponing or removing them completely may be a good idea for now.
Inflation Impact on HOA Assessments and Reserves
Homeowners associations typically maintain a reserve fund, which contains money needed to pay for future major repairs and replacements. For instance, if the roof of your HOA’s clubhouse is due for a replacement in 10 years, you need to make sure your reserves have enough funds to cover the cost of that replacement when the time comes.
A reserve study tells you how much you should have in your reserves. But, those studies can become outdated as inflation rates go up. If your reserve study didn’t account for a high inflation rate, it’s likely that it’s no longer accurate. It’s also likely that you don’t have enough money in your reserves anymore to cover the cost of future major repairs and replacements.
This is another way how inflation can affect HOA dues. Reserve contributions are often calculated and included as part of homeowner dues. Thus, the need to keep your reserves up to a safe level means having to raise dues as well. Other than that, boards can also levy special assessments to attain the right funding level.
Of course, your board can always choose not to fund the reserves. This is dangerous, though, as it can result in a terrible disaster, much like what happened to the Surfside condominium in Florida.
How Higher Dues Can Contribute to Higher Delinquency Rates
Unfortunately, wages don’t always increase with inflation rates. In fact, the federal minimum wage has remained the same since 2009. As such, even if you do adjust your budget to accommodate the price hikes, some homeowners won’t be able to keep up. Homeowners need to pay for their own utilities, food, and other needs that there might not be much left for association dues.
As a result, your homeowners association might have to deal with more delinquencies. In the most extreme of scenarios, a spike in delinquent owners would mean having to foreclose on several properties. Due to the poor economy, associations may have trouble finding new homeowners to fill these vacancies in the community.
Inflation Impact on HOA Dues: How High Is Too High?
While a common response to inflation is to raise dues, HOA boards must be careful to act within the law and the scope of their authority. Some states place a limit on HOA dues increases, requiring that any increases over a certain dollar amount or percentage receive membership approval.
Additionally, your association’s governing documents may have something to say about the matter. Make sure to check your HOA bylaws and CC&Rs to see whether or not you can raise dues and by how much.
It is easy to overlook these things when you’re trying to keep your community afloat in the midst of rising expenses. But, acting outside your powers and the laws within your state can lead to liability for both the HOA and, sometimes, even individual board members.
A Necessary Decision
As you can see, there is a clear connection between HOA dues and inflation. To make sure your association doesn’t get left behind, it is imperative to adjust your budget. Oftentimes, that means having to cut non-urgent expenses and charge more in HOA dues.
Is your homeowners association board having trouble preparing your budget while considering economic factors? Professional advice is what you need. Call Clark Simson Miller today at 865.315.7505 or contact us online to request a free proposal.
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