HOA Budget: Seven Best Practices for HOA Budgeting
HOA budgeting has become increasingly more important due to the rising costs of insurance and vendor fees. These rising costs make it increasingly difficult to maintain vendor relations and to plan an effective budget. Most homeowner association boards rank budgeting among their least favorite responsibility; however, it is one of the most important tasks. The effectiveness of your annual budget has a long-term impact on your HOA’s financial health and residents’ quality of life. Although you cannot stop the rise in costs, you can counter them, and a best practice for avoiding assessments is by increasing your association’s yields.
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?*
- 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
Before you build a budgeting plan, it is important to understand your funds. It is important for your association to determine the size of your reserve fund through a reserve study, an assessment of the current condition of your funds and projected future costs of common assets. You should meet with your manager and review the reserve study and analyze your funding level before building an annual HOA budgeting plan. FirstService Residential considers funds at 80% or higher a “good” funding level. Of course, the ideal level would be 100%; however, following a professional reserve analyst’s funding recommendation is a best practice.
Creating an annual budget that works for your association can be difficult. Follow these seven tips to create an annual budget that works best for your HOA.
Apply a strategic approach.Ideally, you should have a 1-, 3-, and 5-year financial budgeting plan, and your annual budget should reflect this plan. In addition, you should also budget for any large projects that you will not be able to fund in the upcoming year.
One of the most important steps before budgeting for the upcoming year is to review your current vendors to determine which vendors are planning on increasing their fees in the upcoming year or if they are planning on changing the services they offer. By reviewing beforehand, it allows you to evaluate your satisfaction with them as well as see if they are still within budget. Additionally, if needed, you may want to shop around for new vendors, or at the very least, renegotiate for better fees and service terms. Vendor fee increases can be due to the change in minimum wage that goes into effect at the beginning of the year. (Learn about the increase in minimum wage and how it could affect vendor fees in our article, “How Will the Increase in Minimum Wage in California Impact Your HOA?”. FirstService Residential clients can take advantage of a vast network of vendor relationships and can help your association evaluate and negotiate for quality services.
Put the needs of your community first.The objective of all your HOA budgeting decisions should be to improve your community and enhance the lifestyle of all the residents who live there. Therefore, keep your personal interests, as well as any other special interest, out of your budget decisions. When discussing these community changes during board meetings, to avoid missing any concerns a board member may have, it is important that everyone who has an opinion is heard.
Be meticulous with expenses.You may be tempted to simply annualize expenses from the previous year, but you should avoid doing so. Instead, you should carefully review each expense for the year which will allow you to get more accurate insights into the needs of your community.
Manage delinquencies.All HOAs deal with delinquencies and budgeting for them is crucial to the financial health of your association. If you anticipate having any delinquencies, you will need to include them in your budget as “bad debt expenses.” Remember that your community’s basic services will be at risk if you have too many receivables. Apply a strict collections policy, and make sure that you charge late fees consistently to help reduce the number of delinquencies. Unfortunately, you probably won’t be able to completely eliminate them, but you can minimize them.
Review your operating fund.In order to avoid having any shortfalls, you must maintain enough funds in your budget to pay for at least a month’s worth of maintenance. No HOA board wants to give their residents a special assessment fee in order to cover operational expenses. Avoid doing so by looking for unique ways you can generate income and reduce expenses. Above all, avoid adding a contingency line item to your budget. It is likely to present problems down the road.
If you must, make those difficult choices.Perhaps your accountant has suggested some tough solutions during your audit. Now may be the time to put them into practice if you are facing shortfalls. You also may want to consider adding a budget line item for a potential gap or an accumulated deficit. Another alternative is to levy a special assessment.
Follow the rules.Make sure that you are doing everything “by the book” (that is, according to California law and your governing documents). For example, although your board can legally transfer funds temporarily from your reserve fund to your operating fund, California law requires that you communicate the board’s intent to consider the transfer in a notice of meeting. Also, make sure that you have proper internal controls in place so that funds cannot be misappropriated or wasted.