HOA budget 101: A guide to planning, best practices, and more

What is an HOA budget?

An HOA budget is the financial plan a homeowners association creates to project and manage its income and expenses for a set period, typically one year. It outlines sources of income, such as monthly assessments and amenity fees, as well as potential expenses, like landscaping, utilities, insurance, and management fees. This document acts as the financial foundation for the entire association.

This article is not intended to and does not constitute legal advice or create an attorney-client relationship. Board members should consult their association’s attorney to discuss the legal implications of their decisions or actions prior to proceeding.
 

Purpose of an HOA budget

The purpose of an HOA budget is to help the board make informed financial decisions, maintain the community, and meet legal and operational responsibilities. A well-structured budget gives the board a clear picture of available resources, helps determine assessment levels, and provides a roadmap for spending. It also supports long-term planning by allocating money to the reserve fund for future repairs and capital projects.

For example:

"In California, reserve studies are required to be updated annually as part of the budget approval process, which has prompted many boards to adopt a more proactive and data-driven approach when planning. With this annual requirement, boards are better able to plan for long-term maintenance and capital improvements, ensuring that their reserve funding is always aligned with the building’s future needs. This practice helps mitigate financial surprises and supports a stable, long-term financial outlook for our communities."

Daniel Valdes, vice president of property solutions for FirstService Residential’s California market.

A solid HOA budget is also an essential tool for managing risk. Without one, boards can quickly find themselves unprepared for unexpected costs or necessary maintenance, which may result in deferred repairs or special assessments. Budgeting allows boards to plan ahead, prioritize needs, and avoid surprises.
 

How to plan your HOA budget

Creating a successful HOA budget is a step-by-step process. Below are the 7 steps we recommend our communities follow when establishing their annual HOA budget.

1. Gather financial data

   Start by collecting all relevant financial information from previous budgets, financial statements, and account balances. This data provides a clear picture of the association's financial health and helps identify trends or potential issues.
    

2. Establish a budget committee

   It might be a good idea to form a committee of HOA members, including the treasurer, finance-savvy residents, and a representative from the management company (if applicable). Their collective knowledge and expertise can support a well-rounded budget.
    

3. Determine priorities

   Identify the short-term and long-term needs of your community. Prioritize maintenance and improvement projects, keeping in mind the association's goals and residents' preferences. Marc Kotler, president of the New Development Group at FirstService Residential, mentions that in New York, “The largest increases we’re seeing are the cost of labor, as well as repairs and maintenance, especially as a building gets older. These are more expensive repairs that will happen more frequently over time."
    

4. Estimate expenses

   Use historical data and quotes from service providers to estimate operational costs accurately. Consider inflation and any potential increases in expenses, such as rising utility rates.
    

5. Plan for the reserve fund

   Consult with a financial advisor or reserve study specialist to assess the community's reserve fund needs. They can provide a professional assessment of your community's future capital expenses and recommend an appropriate funding plan.

   "It’s paramount for boards to remember that the reserve plan is not simply a savings plan; it’s an action plan. Repair and replacement of the common elements of the condominium not only ensure safety and longevity, but they can also significantly affect property value and resale value in the real estate market."
   
   Mark Hopkins, president of the Ontario market for FirstService Residential

6. Calculate assessment fees

   Once you have a clear understanding of your income and expenses, determine the assessment fees required to cover your budget. Balance the needs of the community with the financial capacity of residents. Keep in mind that significant increases in assessment fees may meet resistance from homeowners.
    

7. Review and adjust

   Present the preliminary budget to the board and homeowners for review and feedback. Be open to suggestions and be prepared to adjust as needed. Transparency is key to maintaining trust within the community.

   "Understanding reserve funding is a lightbulb moment for residents. When they see they're only 2 percent funded, the urgency becomes clear."
   
   Susan Ward-Freeman, president of the Texas market high-rise division for FirstService Residential

Key tips on HOA budget planning

Planning an HOA budget can be complex, but these best practices can help simplify the process and lead to stronger financial outcomes:

• Start early: Begin budget planning at least 90 days before your fiscal year ends. This gives you time to gather information, get board feedback, and make necessary adjustments.
   
• Communicate with your community: While the board is responsible for the budget, clear updates to homeowners help avoid confusion and reduce pushback when assessments rise.
   
• Work with experts: Consider collaborating with your management company’s financial team, CPA, or reserve study specialist to get professional input. Experienced advisors can help identify savings opportunities, reduce liability, and bring clarity to complex financial questions.
   
• Be conservative: Underestimating expenses can lead to cash flow issues or the need for special assessments. Use realistic figures and build in a small buffer for the unexpected.

"Boards should ask what the competition is doing - because if your neighbor charges $1 per square foot and you're charging $48, you've got to ask why."

Susan Ward-Freeman, president of the Texas market high-rise division at FirstService Residential

Common HOA budgeting pitfalls to avoid

Creating a successful HOA budget is crucial for the financial health and overall well-being of your community. To help your budgeting process go smoothly, it's essential to be aware of common HOA budget pitfalls and how to avoid them. Let's explore some of these pitfalls:

1. Underestimating expenses: One of the most common budgeting mistakes is underestimating the actual costs of running an HOA. Failing to account for all necessary expenses, including regular maintenance, insurance, utilities, and emergency repairs, can lead to budget shortfalls. Thoroughly review historical financial data and, if possible, consult with industry experts or professionals to get a realistic estimate of expenses.
    
2. Overly optimistic revenue projections: Relying on overly optimistic revenue projections, such as expecting all homeowners to pay their assessments on time, can result in budget deficits. Delinquent payments and unexpected revenue shortfalls can disrupt your financial plans. Base your revenue projections on historical collection rates and maintain a realistic outlook. Be prepared for late or missed payments by allocating a contingency fund in your budget.
    
3. Inadequate reserves: Failing to allocate sufficient funds to the reserve account is a common mistake. Inadequate reserves can leave the HOA ill-prepared for major repairs or replacements, causing financial strain. Conduct regular reserve studies to determine the appropriate funding level, and include the recommended contributions to reserves in your annual budget. Prioritize long-term financial stability.
    
4. Not adapting to changing needs: HOA budgets should be flexible and adaptable to evolving community needs. A common pitfall is not adjusting the budget to account for changing circumstances, such as the need for new amenities or infrastructure upgrades. Regularly review and assess your budget. If new needs arise, be prepared to reallocate funds or consider assessment adjustments with homeowner input. "Developers need to ask if spaces are adaptable for future trends. For example, can a tennis court be converted into pickleball courts?,” adds Susan Ward-Freeman.
    
5. Ignoring delinquent assessments: Delinquent assessments can have a cascading effect on an HOA's financial stability. Ignoring the issue can lead to insufficient funds to cover expenses. Implement strict collection policies and take proactive measures to address delinquent assessments promptly. Legal action or collection agencies may be necessary in some cases.
    
6. Lack of transparency and resident involvement: A lack of transparency in the budgeting process can lead to distrust among homeowners. Excluding residents from the decision-making process can result in opposition to the budget. Maintain open communication with homeowners and involve them in the budgeting process. Share financial reports, seek feedback, and encourage participation in budget-related discussions and meetings.
    
7. Failure to plan for contingencies: Unexpected emergencies, like natural disasters or equipment breakdowns, can place a significant strain on an HOA budget if not adequately planned for. Create a contingency fund within your budget to cover unforeseen expenses. Having a financial safety net can prevent the need for special assessments or borrowing in emergencies.
    
8. Inadequate record-keeping: Poor financial record-keeping can lead to confusion, errors, and missed opportunities for cost savings. Invest in robust accounting software or hire professional help to maintain accurate financial records. Organized records are crucial for tracking income, expenses, and budget performance.

Creating the best HOA budget is an ongoing process that requires commitment, transparency, and strategic planning. A well-crafted budget not only supports the financial stability of your community but also enhances property values and resident satisfaction. By following the steps outlined above, your HOA can achieve financial success and make informed decisions that benefit everyone in the community.

"An annual plan that includes multi-year testing and supports the proposed budget would make future expenses predictable and justify the need for adequate budgeting. As systems age, repair and maintenance costs will inevitably rise. All the cliches tend to stay true in condominiums, including: 'pay now or pay later' and 'you usually get what you pay for.' Boards should recognize that budgeting for future events is simply contributing to the shared costs of common elements."

Mark Hopkins, president of the Ontario market for FirstService Residential

To learn how a professional management company like FirstService Residential can support your community, contact a member of our team.