Seven Best Practices for HOA Budgeting

Do you dread preparing your HOA’s annual budget as much as you dread stepping outside of your Arizona home on a summer afternoon? You’re not alone. For many HOA boards, it’s their least-favorite task. But look at it this way: You’re making sure that your HOA remains financially stable, and that’s an important job.

Whether you live in a high-rise building, a townhome, or a large-scale community, FirstService Financial offers FirstService Residential clients with tailored solutions that often increase yields on investments. How does 3x the national rate sound to you?*

Recent examples:

• A high-rise client saw their reserve interest increase 6x their original amount, a $59 per unit per month revenue gain – from $28,000 to $176,000
• A 316-unit townhome community saw their reserve interest increase from $543 to $52,000 – a $13 per unit per month revenue gain
• A 1,530-unit master planned community saw that they can increase their reserve interest by $274,000, generating more than $15 per unit per month of revenue gain

 
To prepare your annual budget successfully, here are seven rules you should follow.
 
1.  Make residents your first priority. 
Your HOA budget shouldn’t serve any special interests (including your own). The entire community feels the impact of the budgeting decisions you make, so your goal should be to enhance the community and maintain a high quality of life for all residents.
 
2.  Plan for both your short- and long-term needs.
In addition to evaluating the needs of the community in the coming year, plan for three and five years out. Look at those projects that you can’t fund this year. And while you’re looking at your budget, consider price increases from your current vendors—and whether you might want to get new bids in the coming years. A national community management company can offer the advantage of its buying power when negotiating prices.
 
3.  Look at your expenditures carefully.
It may be appealing to take shortcuts, but that won’t give you an accurate picture of your needs. Look at each expense rather than annualizing them from last year.
 
4.  Do your best to control delinquencies.
Delinquencies come with the territory when you live in an HOA. When you’re preparing the budget, you will need to consider anticipated delinquencies as bad debt expenses. A tough approach to collections—and consistency in charging late fees—can help minimize delinquencies. However, it’s highly unlikely that you can get rid of them all together. Just keep in mind that an excessive number of receivables can put your community at risk in terms of basic services.
 
5.  Be diligent with your operating fund.
At the very least, you need to have an operating fund balance that can cover a month of maintenance. Otherwise, you may have to levy an assessment to manage the shortfall. Have you considered every source of revenue? Don’t be tempted to include a contingency line item in your budget as this can cause future problems.
 
6.  Make those tough choices when necessary.
If your CPA has provided recommendations along with your audited financial statements, you may have to consider them now. Also, it’s probably a good idea to include a budget line item to account for an accumulated deficit or a potential gap. Or you could levy a special assessment.
 
7.  Dot your i’s and cross your t’s.
Do everything with care and according to the rules. Remember to get board approval for all reserve expenditures, and take a close look at your internal controls to remove any chance that funds are mishandled or carelessly wasted.
 
You have the future of your community in your hands during the annual budget process, so you want to do it right. For more budgeting advice and additional insights, contact FirstService Residential, Arizona’s leader in community management.