HOA Budget Bloopers: 7 Missteps to Avoid
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Thinking ahead to the fresh start of a new fiscal year is both exhilarating and tedious. As a board member, you're in tune with your association's needs and what your residents' expectations are. But before you begin outlining the financial steps for your community, keep these 7 HOA budget bloopers in mind as you honor your fiduciary duty.
1. Planning for the best, not forecasting the worst.
Going into your HOAs budget plan with a positive attitude will, no doubt, make the outline process a bit smoother. You want what's financially best for your community, but it's just as important to anticipate events that could send your budget into a tailspin. Think COVID-19, for example.
Before this became an all-too-real fact of life, you were most likely confident that your budget accounted for every expense, money was carefully allocated, and special assessments and reserve funds were accounted for. But as many have experienced this year, global events can change nearly every aspect of what "normal" looks like.
None of us could have imagined the added sanitation and maintenance costs, missed dues and a general feeling of "when will this end?". The jury is still out in terms of exactly how many associations were financially impacted and how different their budget plans for 2021 will look as they seek to recover losses. We can only hope that an event like a pandemic won't happen again, but the fact remains that optimism and preparation aren't enough to expect the unexpected.
But the saying, "It's better to have it and not need it than to need it and not have it," speaks directly to the cautious optimism that comes with HOA budget planning. Consider reserve funds or special assessments. Designed to be your association's "in case of emergency" button for unplanned events, having these in place can help offset devastating losses and keep your community aesthetically and financially fit.
However, there are a number of ways to handle financial shortfalls, including emergency lines of credit and preferred rates on short-term loans. Be sure to explore all options with your management company and legal advisor before pressing the red button.
2. Raising dues without transparency.This is a perfect segue into why raising dues are critical to the financial stability of an HOA. Although no one likes a surprise bill, planning for potential repairs or updating amenities via slowly increased dues isn't just an effective way to cover anticipated costs, it also allows your reserve fund to truly be your "emergency button." As a community leader, it's not just your responsibility to make these decisions but also to make them with clarity. Inflation is a common occurrence that affects everyone, HOA budget or not. And like the price of gas, groceries and cell phones rise regularly, a news article typically precedes the financial impact, allowing people to adjust their personal finances, separate their needs from wants and live accordingly. This should be the model when it comes to raising dues.
Give advanced notice of the increase, talk about where the money will go, why it's happening and when residents can expect the change. Transparency as a board member gives you a leg to stand on and builds trust between residents and community leaders.
But just don't provide one notice and expect it to stick. Make multiple attempts to remind homeowners. Some of us have trouble remembering what we ate for breakfast this morning, so the more you communicate the "who," "what," "when" and "why," your association can expect to continue down the path of financial stability and understanding.
3. Not keeping it local.
As a board member, it's essential to know who you do business with. What vendors do you trust to maintain your amenities and landscaping? As a community, how will potential homebuyers know where to find you? Where you spend your money and how it's spent is just as important as how you budget it.
Depending on who your property management partner is, your community's business relationships should feel personal and natural. For example, if a property management company manages your community, they should have a reservoir of resources, countless vendor partnerships and solid relationships that can be leveraged to ensure your association gets a valued service at reasonable, or even below market, prices.
Additionally, if you're considering a property management partnership, word-of-mouth is still an effective form of marketing. Albeit, grassroots efforts to build and maintain vendor relationships take much more time, but the benefits can be the same. As a community leader, it's not only important to be in tune with homeowners but to have those same connections with businesses in your area.
4. Not reevaluating fixed expenses.
You've built relationships with local businesses, or you've trusted your property management company to find the best vendors, marketing tools and maintenance services to keep your community running smoothly.
Regardless of how you choose to make these decisions, it's wise not to assume that these costs of these services won't change over time. Just think of the evolution of a board's role year after year. New challenges and needs suddenly become a part of the discussion. This leads to more meetings, more planning and more money. From the vendor's point of view, their clientele is growing, and they've expanded their catalog of services. In that same vein, these yearly changes often involve a different business model with higher rates.
As you start preparing your budget, make room for normal inflation of prices. Check in with these businesses to get a detailed price list. If you have a property management company, trust their experts to provide you with updates and tailored recommendations in line with your budget and, more importantly, your community's needs. We recommend reviewing your vendors annually, or request other bids for similar work, to see if there are less expensive options in the market.
5. Excluding special assessments.
If you've stayed on top of costly community equipment, you're already aware of its shelf life. If it's almost time to replace such equipment, be sure you know the replacement cost and communicate with residents about the value of the replacement and why, if unexpected, a special assessment is necessary to accommodate residents’ lifestyles.
Keep in mind that special assessments are not to be used in emergencies — that’s what effective HOA budget planning and increased dues are designed for. In your notices to residents, make it clear about the difference between the two, so everyone remains aligned.
Need more info? Check out our 3-part series of how to approach special assessments.
6. Not updating insurance.This is another line item that can't be ignored. Take into account what your association has experienced in the last year. What coverage did you wish you had? Whether it's weather or amenity-related, think of ways to keep your community properly insured without the worry of an unplanned expense.
Once you've laid out a pattern of your association's most common insurance needs, it's also recommended that boards include coverage packages that protect them from hidden dangers.
Again, dealing with the effects of COVID-19 has surely borne "new normals" and needs. Outlining your coverage should be the first step to understanding how to protect your community at all costs.
What are the next steps?
- Review these coverages with trusted advisors who can further explain the value of these security blankets. It's easy to state, "Better safe than sorry," but community leaders
- Gain full knowledge of the powers included in each policy, how they'll benefit your association and strengthen your overall HOA budget.
- If you’re an HOA in partnership with a property management company, tap into their resources, including leveraging their buying power to get the best rates for the right coverage.
7. Not keeping records.
This is easier said than done. With the help of a property management company, boards should take full advantage of their financial resources, CPAs and standard operating procedures to guarantee accurate recordkeeping, including how often you can review financial reports and where residents can access this information.
This is the other side of budget transparency. It's not enough to simply tell homeowners that their money was well spent, you have to show the "after" too. In turn, property management partners' accounting services can help outline how much of your association's money goes to community maintenance. Plus, accurate recordkeeping is a solid paper trail in case financial snags happen down the line, or if you simply want to compare budget line items with official financial reports.
These 7 HOA budget blunders, while seemingly unavoidable, often aren't. However, it's fundamental to keep each of these guidelines in the driver's seat as you carefully act out your fiduciary responsibility as a board member.