Most Texans see the end of summer as a time when they return to work and school routines and can finally look forward to a reprieve from the stifling heat. But if you’re on the board of your homeowners association (HOA), there is something else you should begin to think about now as well: next year’s budget.
“Creating the annual HOA budget is many board members’ least favorite task,” says Ashlynn Wells, senior vice president of FirstService Residential in Texas. “As a result, boards should have a timeline in place for each step in the budget process that aligns with their governing documents and should identify responsible parties to work on initial drafts. Having a professional management company prepare the first draft is always recommended.”
Wells points out that taking a proactive approach is the best way to serve your association. “Fulfilling your fiduciary duty means looking out for the interests of residents,” she says, “and that includes doing your best to maximize savings for your association.”
If you’re not sure where to begin looking for opportunities to save money and increase value for your community, you’ve come to the right place! We’ve identified four areas of your budget you may be able to significantly impact – if you plan ahead.
1. HOA Insurance
Whether you’re on the board of an association for a single-family, condominium or other type of common-interest community, insurance is going to be one of the largest expenses in your budget. This is especially true if your community has a lot of amenities.
According to Jamie George, vice president for the Texas and West regions at FS Insurance Brokers, “HOAs have unique requirements, so it’s important to work with an insurance agent or broker who has experience with them. This type of professional will be able to customize your policies to ensure that your community is sufficiently covered.”
Even if your premiums have remained stable for the past few years, George says that it’s a good idea to re-examine your needs each year. Make sure your agent or broker considers these important questions:
Do you have full replacement value coverage, including coverage to rebuild to current codes – rather than to original standards – in the event of damage or loss?
Are your deductibles too high?
Does your directors and officers (D&O) insurance cover past, present and future incidents? Coverage for third party employment practices liability coverage?
Does your Fidelity coverage include computer fraud and forgery?
“Lower premiums shouldn’t come at the expense of future coverage,” warns George. “It really adds insult to injury to realize you’re underinsured when your community is hit with a major loss.”
Additionally, you’ll want to make sure your current coverage is as cost effective as possible. “By reviewing a community’s policies, we’ve often been able to increase their coverage without increasing their premiums,” explains George. “And in some cases, we’ve even been able to reduce the premiums.”
2. Vendor Contracts
Another area that can take a toll on your budget is your association’s spending for regular services, such as landscaping and trash removal. To get the best rates and terms, put these contracts up for rebidding regularly. “You may think that vendors will give the best rates to their loyal customers, but that’s not necessarily true,” says Wells. “The price is almost always negotiable.”
Even the cost of internet, cable, phone, water and electricity can often be negotiated, a fact that surprises many boards. “That’s where a professional community management company can be a big help,” says Wells. “An experienced company will know how and when to negotiate the best prices for you, and if its large enough, the company will have national buying power, which your association can leverage to get better rates.” A good management partner will also be able to review existing invoices and statements to make sure that your existing vendors are charging your association appropriately.
Wells stresses the importance of having consistent oversight of the work your vendors are performing. “You don’t want to be paying two or three times because something isn’t done right or completed the first time,” she says. “If the service isn’t meeting your expectations, it’s time to find a new vendor.” Most management companies will maintain a list of approved vendors. Make sure that the company holds these vendors to the highest standards and continually assesses their performance.
3. Preventative Maintenance
Keeping swimming pools, heating and cooling systems, common buildings and other community equipment and assets in good working order requires you to adequately fund preventative maintenance. Even if it means initially increasing your maintenance spending, you should never skimp on this expense, which will appear in your budget as Repairs and Maintenance. “The expense is well worth it. In the long run, it will extend your equipment’s useful life and reduce the need for costly repairs and replacements down the road,” explains Wells.
Stay on top of maintenance with a checklist that lets you know what needs to be done monthly, quarterly, annually, etc. This should be based on warranty requirements and manufacturer recommendations. Be sure that everyone who performs maintenance only uses quality materials and that they date and sign a form or logbook so that you have a record of their work.
Fixing leaks, upgrading lighting and increasing the energy efficiency of your systems are other steps you can take to significantly reduce your long-term costs. Some cities, such as Houston, provide water alerts that enable you to monitor your water usage and let you know of possible leaks. In Austin, most multifamily condos are required to benchmark their energy efficiency, so any improvements you make will not only reduce your costs, but can help to increase your property values, too.
Consider converting to LED lighting in your common areas and using timers and motion detectors to reduce your electric bill. If irrigation is a significant expense, you can install irrigation water sensors and timers. Of course, you should also keep up on maintenance of all of these systems to get the most savings. And don’t forget to look into whether there may be government or manufacturer rebates for any upgrades you make.
4. Reserve Funds
Planning ahead for capital improvements and major repairs will ensure that you have enough money available when the time comes to start these costly projects. You should be sustaining at least a 70 percent funding level for your reserves, based on the recommendations of your reserve study. If it’s been more than three to five years since you’ve had a reserve study done, have it updated. This will let you know if your reserves are still on track for future work. Both your maintenance funding and your reserve funding should align with the study.
Although you may hear that communities need to allocate a specific percentage of their budget to fund their reserves, what’s really crucial is having the right balance between your operating and reserve funds for your community’s specific needs. Wells points out that “every community is different and will have different needs. You need to base the amount on the reserve study, not a random percentage, for it to actually apply to your community.”
You can make your reserve fund go further with proper investing that yields the highest interest with the lowest risk. CDs are often a good option for this, but Wells recommends working with a good financial management company to help your board make the right investment and banking choices for both your reserve and operating funds.
Contrary to what you may have been led to believe, the budgeting process is not a once-a-year task; it’s really a year-round function. Yes, it does take work to create a realistic and workable annual budget for your association. However, continuous attention to your budget will make your community’s money go further and will reap significant rewards for the financial health of your community for years to come. Getting help from a knowledgeable community management company with financial expertise can make the process easier.
To learn more, see our white paper, Budgeting, Reserve Funds and Financial Planning 101: Building a Powerful Financial Future for Your Managed Community