HOAs are responsible for the financial health of their communities, which means taking care of everyday expenses and preparing for the unexpected. Good budgeting practices help smooth the way, ensuring the best possible living experience for residents.
HOA budgeting isn’t always easy and can be a lot of work. We’ve compiled a few tips and best practice suggestions to ease you through the process.
HOA Budgets Explained
An HOA budget is a financial plan for the community that considers the association’s revenue, expenses, and reserve contributions, usually for the year. You may also choose to do quarterly or monthly budgets. Still, ideally, you want to look ahead as much as possible to prepare for expenses you know about, including contingencies for unexpected costs.
Much like a route planner, the HOA budget guides the board, helping to inform the best possible financial decisions and providing insight into upcoming expenses so they can be adequately planned for. These include day-to-day expenditures, like groundskeeping, building maintenance, insurance, utilities, management fees, etc., plus long-term or anticipated expenses, upgrades, and repairs.
Most importantly, a well-managed budget helps the HOA determine monthly dues, which is the community’s primary income source. Good planning helps avoid special assessments and generally supports better board-homeowner relationships overall.
Some HOAs form budgeting committees and invite residents to weigh in on financial decisions, which helps to promote transparency and understanding. Others may choose to contain the process between the association manager and treasurer. Ultimately, it’s up to the association to decide what works best for it and the community.
Budgeting Tips and Best Practices for HOAs
Look at Past Performance
One thing to keep in mind before you start budgeting—you don’t have to be a financial expert or a CPA to do this! The best place to start is by understanding and itemizing your costs from a historical perspective. Past performance is often a good indicator of how things will go in the future.
Look at trends from the previous three to five years as they will tell you what you’re spending on. As for how much you’ll spend on them in the future, that’s something you’ll need to research. Insurance premiums, in particular, have changed significantly, and it pays to be realistic about how those costs may increase.
Categorize Your Expenses
Separate your expenses into three general categories:
- Operating expenses include maintenance costs (groundskeeping, plumbing, cleaning, etc), supplies and equipment to support maintenance, and utilities (power, water, sewer, waste management, gas, etc.).
- Administrative expenses include legal and accounting fees, office supplies, staffing and payroll, website maintenance, bank fees, etc.
- Fixed costs include insurance, property taxes, income taxes, filing fees, etc.
Audit Your Service Contracts
If you haven’t done so recently, it might be a good idea to dive deeper into the fees you pay for services, supplies, and contract-based utilities (like waste management) to see if you can reduce or optimize those costs. Diligence in monitoring those invoices may help you trim some fat that can be channeled back into reserve funds.
Use Technology
Whether you prefer Excel spreadsheets or software like QuickBooks, technology can make light work out of budgeting. It may take some time to get all the data entered and set up, but updating it will be a breeze, and you’ll benefit from calculations, insights, and reports to share in budget meetings.
Choose an app or solution that’s easy to learn and has all the features and flexibility you need. Solicit opinions from those who will be using the system to ensure everyone’s comfortable with the decision. You may want to research apps that specialize in or have a module for HOA accounting, as it will have all the categories pre-loaded and ready to go.
Do a Reserve Study
HOA budgets should always consider and account for the reserve fund. Reserves should be adequately funded to cover all anticipated (and unanticipated) expenses. A reserve study is usually conducted by a third party. It provides a multi-year plan to ensure adequate contributions for things like roof replacements, pool repairs, roadway or parking lot work, water main replacement, and so on. An inspector will look at the state of common-use items the HOA is responsible for, estimate their remaining useful life, and what it will cost to replace them.
Fees for a reserve study range from a few hundred to a couple thousand dollars, depending on when and how often previous studies were conducted.
Prioritize Transparency
Budgets can make or break the health and happiness of a community. When budgets are well managed, it minimizes the need for special assessments or other unexpected expenses.
Forming a budget committee that includes community members allows residents to have a say in how funds are managed. Chances are there are a few homeowners with financial acumen who would be willing to help, so don’t hesitate to ask. Put the word out in your monthly newsletter and see what kind of response you get.
Budgeting Tips for HOA Boards
Budgeting and financial planning always go smoother with these tips in mind:
- Get granular. Know precisely what you’re budgeting for and itemize accordingly.
- Be conservative. Some costs stay consistent, but preparing for increases is essential. Consider worst-case scenarios and remain apprised of cost and contract increases with today’s volatile economy in mind.
- Maintain a healthy reserve fund. In best practice, aim for a reserve that would cover a minimum of 70% of anticipated repairs or at least three months of operating funds.
- Be strategic. Look ahead to future needs and create a one, three, and five-year plan. Your reserve study is an excellent source to inform projections.
- Review vendor contracts. Go over service contracts to ensure you’re fairly charged for services you need. Renegotiate when possible.
- Reduce expenses wherever possible. Look for ways to reduce energy use, go paperless, and prioritize preventative maintenance, when possible, to lower monthly costs.
- Be transparent. Include members in big-budget decisions and solicit input so everyone feels good about the board’s decisions.
Final Thoughts
Creating an HOA budget might seem like a massive undertaking, but it’s well worth the effort. If you need support in developing and managing your budget, reach out to the HOA management team at Belwood Properties today.
