It’s that time of year again – budget season is upon us. You know the steps to creating your budget, but what drives your process? Are you focused on achieving a particular vision for your community? Avoiding conflict in the community? Solely looking to avoid increasing dues?
If it’s the latter, you may want to reconsider. As a board member, your duty to the community includes protecting property values, and dues are an investment that helps do just that.
Many community board members are afraid of asking residents to pay more to maintain the property or invest in upgrades to it. They don’t want to make their friends mad or lose their spot on the board. Some board members think others will see them as poor planners if they ask for more money. But things get more expensive: insurance fluctuates, utilities increase, salaries go up. At some point, a flat budget will become a problem.
So how can a fiscally conscious board fulfill its duty to the community while keeping conflict and anger to a minimum? Reframe the topic so that homeowners see just how much increases in dues, especially small, steady ones, are in their best interest.
Did you know that 72% of boards don’t have enough in their reserves? Drew Ahrensdorf, vice president of FirstService Financial, explains that up to 10% of that shortfall came from boards not wanting to increase dues during the recent recession. Even when state law requires it, there’s often a loophole in the form of a community vote that lets homeowners avoid spending that money. They vote to avoid funding, thinking that they’ll have sold their home by the time major repairs need to be done or their financial picture will have improved and they can more easily afford higher dues.
But eventually, the items that fund covers have to be paid for, and too often, it’s in the form of a special assessment. Small, regular increases in dues will help your community avoid needing to special assess large amounts down the road!
“Inflation, approximately 2%, can be used to encourage and explain condo fee increases,” says Dylan Murray, director of finance at FirstService Residential. “People logically understand that amount. You definitely want to avoid imposing a double-digit increase. Small increases every year will help you avoid that.”
Small, regular increases are also easier for homeowners financially and emotionally. Many homeowners can’t afford thousands of dollars in a single special assessment and that is a stress on them.
Special assessments can be seen as unfair – they affect the current group of homeowners the same way, regardless of their time in the community. The family who just moved in and the family who has been there a decade pay the same amount, even though the new family didn’t contribute to wear and tear on the community in the same way. Those emotions can cause fractures and dissent in your community. A small uptick in dues, expected and planned for every year, is much easier on everyone.
“Today’s buyers are savvier than in the past,” explains David Jandak, vice president of finance at FirstService Residential. “They want to see financials and to know what’s in the reserve study, that the reserves are funded and that the board isn’t kicking the can down the road.” You don’t want people to pass on buying in your community because they see gaps in your financial planning, eventually leading to lower property values for everyone.
Community upgrades like new playground equipment, a dog park or tennis courts are popular and improve everyone’s property values in the long run, but they require an investment. Residents are more likely to embrace an increase in dues when the increase is related to something residents wanted and they see an immediate benefit from it.
Do your residents understand that deferring maintenance now to keep the budget flat will cost them more in the end? Deferring maintenance is a common way to keep dues steady, but it almost always leads to higher costs in emergency repairs and purchases later on. A small increase in dues to properly maintain common areas and equipment now prevents a larger expense and bigger problems down the road. A loan or special assessment will be much harder on each resident than those small, steady increases we’ve talked about.
Sean Kent, senior vice president of FirstService Financial, points out that avoiding funding your reserve or deferring maintenance creates a snowball effect. “It will lead to an increase in operating expenses and even impact insurance costs and claims. Those can go up as a result of poor maintenance.” Be clear about the costs so that homeowners understand the increase truly is needed; transparency will go a long way!
We understand the temptation to keep association budgets flat. It may seem easier, but in the long run it costs more money, time and stress on everyone involved. To learn more about how a professional property management company can help with effective, long-term budgeting for your community, contact FirstService Residential today.