A complete guide to HOA finances and essential community financial practices

The importance of financial management for HOAs

Understanding your community’s finances may seem overwhelming—whether you’re creating budgets, reviewing financial documents, or funding your reserves.

One of the most important things to consider when analyzing a homeowner's association (HOA) is the current standing of all financials. Managing HOA finances effectively demonstrates accountability and builds trust within the community. 

This article will provide board members with an overview of essential community financial practices and highlight expert insights from Andrew Lester, president of FirstService Financial, and Anthony Gragnano, vice president of South Florida high-rise at FirstService Residential, on topics surrounding insurance, liquidity, capital planning, and best practices for assessing your community’s financial health.
 

What is an HOA financial statement?

An HOA financial statement is an official record detailing the community association's monetary activities. This is one of the main ways to determine a community's economic health.

Understanding community financials and HOA-specific items that must be incorporated into your community's financials depends on state regulations and community bylaws. Still, the general financial documents that should be included regardless of association size or location are:

• Balance sheet: Outlines the association's assets, liabilities, and equity.
   
• Statement of income: Shows the HOA's revenue and expenses over a specific period.
   
• Receivables: All money due to the association from sources like collections and credits from vendors or homeowner fees.
   
• Bank statements: Tracks cash flow and account balances.
   
• General ledger: Provides a detailed record of all financial transactions.
   
• Reserve fund statement: Reflects savings for future repairs and capital improvements.

These documents are available to homeowners and can be requested from the association management team.
 

What should I look for in HOA financials?

The balance sheet

The balance sheet is the first section you should seek out in your community financials. Balance sheets are the best tool for gaining fundamental insight into the community's financial health.

When reading the balance sheet, you will notice it has two sides that must "balance." One side details the association's assets, while the other lists the association's liabilities and equity.

• Assets: Cash, accounts receivable, reserve accounts, investments, and fixed assets, like property and heavy equipment.
   
• Liabilities: Taxes, utility bills, loan payments, pre-paid assessment fees, and wages.
   
• Equity: The association's net worth, which is what remains after all the liabilities are paid.

Mastering a balance sheet is key to tracking cash flow—many mistake equity for available funds, overlooking assets in accounts receivable that are not yet liquid. Stay financially informed by learning to read balance sheets with confidence.
 

Reserve Funds

Funding your reserves is crucial for the financial health of your community, yet for many associations, it's one of the most poorly addressed budget items. In fact, 70% of association-governed communities are underfunded by 70% or more.

"The reserve study tells the board the size, timing, and cost of projects, sometimes decades into the future," Lester says. Rather than seeing contributions to a reserve fund as an extra expense, they are providing long-term savings. Without reserves, homeowners may need to seek alternative sources of funding when repairs or capital improvements become necessary – such as seeking a loan or levying special assessments – becoming a more significant burden to homeowners down the line.

Although some states specify how much your annual fee must go toward your reserve fund, you shouldn't depend on this figure to determine your needs.
 

Current HOA insurance challenges

Rising insurance premiums

Insurance remains a top concern for many HOA boards, especially as premiums continue to rise. Working with the right broker is one of the most important aspects of managing HOA financials. "Is it someone that they trust and who's knowledgeable in community association insurance?" Lester emphasized. He noted that commercial brokers don't always have the right depth of knowledge for this niche, so we rely on our in-house experts to help guide and educate our boards.
 

Complexities of the insurance market

Navigating the insurance market can be another significant challenge for HOAs/condos/stratas. There's an expectation among boards that insurance quotes should be delivered 30 or more days before policy renewals. "Unfortunately, that's not how the marketplace works," Lester explained. He also highlighted how the volume of buildings renewing policies simultaneously—sometimes hundreds or even thousands—can delay the process. That is why boards must understand these complexities to align their timelines and expectations better.
 

The importance of proactive loss prevention

Lester emphasized the importance of communities practicing proactive loss prevention to help control rising insurance costs. During his conversation with Gragnano, he highlights the necessity of minimizing claims effectively. When asked: "After a loss happens, what are you doing to minimize the claim and close it out as fast as possible?" Lester responded by outlining the importance of reducing friction costs, lowering claim frequency, and decreasing claim severity to help premiums align with these preventive efforts over time.
 

Partnering for better outcomes

Building strong relationships with subject matter experts and brokers and fostering open communication is essential. This allows boards to better align their expectations and decisions more effectively with the realities of the current insurance market and how it can specifically affect their community.
 
 

Planning and financing capital improvements

Start with a reserve study

Effective capital improvement planning begins with a reserve study. This outlines the size, timing and cost of long-term projects. Boards can use their reserve studies as roadmaps to align their budgeting strategies with anticipated expenditures.

A reserve study not only helps maintain financial preparedness but also supports transparency among homeowners. Boards can confidently communicate upcoming needs and the rationale for funding measures to foster trust and cooperation among community members.
 

Explore financing options

When it comes to funding capital projects, associations consider two primary options—special assessments and loans:

• Special assessments: These are one-time, upfront payments required from homeowners. While they offer a straightforward solution, they can burden homeowners with a significant financial burden.
   
• Loans: Loans provide greater flexibility by spreading out repayment over an extended period, such as 10 or 15 years. This method is mainly used for large-scale projects where affordability is a concern.

Lester emphasizes the importance of working with specialized lenders when associations are considering a loan.

"You can't just walk into a bank and get a loan for a condominium building. Dedicated community association lenders are working with specialized facilitators, like FirstService Financial, to help you get the right terms and conditions and close the loan when you need the funds."
 

The role of subject matter experts

Subject matter experts can play a crucial role in navigating complex financing options. From selecting the right lender to finalizing loan agreements, professional guidance supports the board in making informed decisions throughout every process. The goal is to help secure funding that meets the immediate tailored needs of the community while minimizing financial strain on residents.
 
 

Protecting and investing HOA funds

To protect and grow association funds, boards must first understand their liquidity needs. This assessment goes back to the reserve study, which provides clarity, cost, timing, and scope of future projects. Three expert tips for practicing proper liquidity management include:

1. Prioritize safety over yield: Boards could often take a cautious approach to investments. However, their decision-making should account for economic conditions, such as fluctuating interest rates. That's why clear policies and professional guidance are essential when managing investments, and boards should avoid risk-taking and prioritize stability to help their funds be accessible when needed for upcoming projects.
    
2. Understanding market conditions: Factors like interest rate trends, economic stability and the timelines of upcoming projects greatly influence liquidity strategies. "If interest rates are rising, we keep investments shorter-term. If rates are falling, we look for opportunities to extend and lock in better yields," Lester mentions. By assessing these conditions, boards can align their strategies with short-term needs and long-term financial objectives to optimize efficiency and security.
    
3. Implementing fraud protection: Protecting association funds extends beyond having sound investment practices to address the risks of fraud. With many associations managing millions of dollars, strong internal controls are key. Lester emphasized these three best practices:
    
   • Removing board members as signers on accounts
      
   • Transitioning away from paper checks
      
   • Using fraud mitigation tools

 

Building a strong financial future for your HOA/community

Plan for the unexpected

The first step in maintaining your HOA/condo/strata's financial health is creating a well-planned annual budget that will account for expected and unexpected occurrences. This could range from insurance premium hikes to an elevator malfunction that requires emergency repairs. All of these circumstances should be accounted for in your annual budget to keep your monthly financials on track while being prepared for any surprise spending.
 

Operating Costs

Include staff salaries, vendor services, professional fees, insurance, utilities, maintenance, office expenses, and miscellaneous expenses, and collecting unpaid dues and fees.
 
While boards cannot control macroeconomic factors like tariffs on imported products such as construction or cleaning materials, and concerns about a recession or inflation, they can focus on proactive financial planning and cost-effective strategies to mitigate these external pressures.
 
Boards partnering with FirstService Residential can leverage its extensive purchasing power to negotiate better vendor contracts. secure favorable pricing on essential services and products. By consolidating purchases across thousands of properties, FirstService negotiates preferred vendor agreements with significant discounts that individual communities or smaller property management companies simply cannot achieve on their own—creating immediate and sustainable cost savings that directly benefit residents.
 

Prioritize community goals

Your board and association management teams need to come together so that everyone has a unified vision of the future objectives of your homeowners. To further strengthen this collaboration, consider inviting an auditor, attorney, or insurance agent. Assemble key priorities for the coming year while assessing any necessary improvements that could provide desirable returns on investment—even with increased assessment costs considered.

You don't have to be an accountant to create a solid foundation for your community's financials and HOA financial statements. For expert support in navigating your community's finances, explore the insights and services offered by FirstService Financial.
 

Expert insights on insurance, capital planning, and liquidity

Watch our “insighters” video series to learn more about HOA/condo/strata finances and community financials from Andrew Lester and Anthony Gragnano, as they break down key financial challenges facing community associations. From navigating a complex insurance market to mastering capital planning and optimizing liquidity, they share expert strategies to help communities achieve financial stability.

Contact us to learn more about how FirstService Financial can support your community’s financial well-being.