The board members of condominium owners associations (COAs) and homeowners associations (HOAs) have the fiduciary obligation to maintain the community’s financial health. However, this can be a challenge especially if they haven’t hired an association manager.
Still, if your COA and HOA board members are self-managing the association, there are ways to ensure their financial success. This article will touch on the steps that COA and HOA boards can take to improve their financial management.
How do COAs and HOAs “earn” money?
Associations don’t actually “earn” money. It’s the board of directors’ duty to collect fees from residents, who are automatically deemed members of the association the moment that they become homeowners. COA or HOA fees are different in each community, but the average monthly fees in the U.S. fall anywhere between $100 and $700.
What are the COA and HOA fees used for?
Monthly fees are used for a variety of services. These include:
- Civic amenities. The fee that homeowners pay per month is used to cover the costs of trash removal, sewer line maintenance, and the like.
- The community’s insurance covers common areas such as parks, playgrounds, and pools. Homeowners still need an individual insurance policy to cover everything inside their condo or home.
- Lawn care. COAs and HOAs are responsible for making sure that lawns and gardens in common areas are well-maintained.
- Pest control. For multi-unit buildings, townhouses, and condominiums that have pest problems, monthly fees may be used to pay for pest control services.
- Maintenance and repairs. A chunk of the monthly fees will cover the costs to repair and maintain common areas such as parking lots, roads, and so on.
- Neighborhood amenities and services. Some high-end communities have amenities and services such as security systems, fitness centers, clubhouses, and so on. These types of communities typically charge higher monthly fees.
A portion of the fees will go into the association’s reserve fund, which is used to pay for unexpected expenses. For instance, if the dryers in the condominium’s laundry room need repairs, the association can cover the costs using their reserve fund.
Why do COAs and HOAs need to be financially healthy?
Let’s take a page from the pandemic. If there’s anything that the COVID-19 pandemic taught us, it’s that communities must be prepared. COAs and HOAs should seek to maintain the community’s financial health so they can continue serving the residents through anything.
Associations use their funds mainly for maintenance and repairs, however, unexpected events (e.g. a burst pipe) can cause problems, especially if the association doesn’t have enough saved up. When this happens, the COA or HOA board of directors can require their members (aka all homeowners) to pay a “special assessment”.
A special assessment is a fee that COA or HOA boards may charge if their finances are insufficient. Take note that your residents won’t be happy to hear about this. Poor financial management can turn your tenants and residents against your COA or HOA board. To avoid this, you must put long-term plans in place and set aside enough funds for unexpected expenses.
How can your COA or HOA improve its financial management?
#1 Conduct an annual audit
Your association’s Covenants, Conditions & Restrictions (CC&Rs) likely require you to conduct an annual audit. Even if it’s not specified, you should still consider conducting an audit as it helps your HOA assess its financial health. Specifically, it lets you see if your community actually has cash flowing in. A property management company can help your HOA or COA conduct a comprehensive audit.
#2 Source and shop locally
Shopping locally will help you save a lot of money. For instance, instead of sourcing your event decorations from overseas, choose to shop with local suppliers. Not only does this help you save, but it also allows you to establish positive business relationships. Plus, it opens the potential for rewards and discounts!
#3 Approve all purchases
Members of the board usually have access to the association’s bank account, but that doesn’t give them the authority to use the money whenever they want. Make sure that the members of the board are aware that they must seek approval from the rest of the board members before buying anything, even if it’s for the community’s improvement.
Better yet, ask a property management company to handle your bank account for you. With a third-party property manager by your side, you can ensure that you don’t spend unnecessarily.
#4 Elect a board member with financial experience
If possible, elect a homeowner with financial experience to be a member of the board. This person should then be the association’s treasurer. Their job is to regularly review the association’s financials and to double-check for accuracy. If no one in your neighborhood has financial experience, you can enlist the services of a property management company.
#5 Agree on an accounting method
There are three types of accounting methods that your association can use — accrual basis, cash basis, and modified accrual. Accrual basis is the most common accounting method and is used by many HOAs around the U.S. In general, it records and reports transactions as income and expenses, regardless of being cash, money, or otherwise.
The cash basis of accounting tracks cash transactions when they are received and disbursed. However, this method is more tedious and time-consuming and requires the expertise of an accountant.
Modified accrual of accounting is a combination of the accrual basis and cash basis of accounting. Among the three, it results in the most accurate financial reports. Essentially, it records expenses like the cash method, but it reports income like the accrual method.
Should you hire a COA or HOA management company?
To ensure that your COA or HOA receives the attention that it deserves, you should consider hiring a property management company. This way, you can ensure that professional accountants are always keeping tabs on your association’s finances. An HOA management company can help you with tasks such as:
- Preparing and evaluating financial reports
- Assisting with reserve fund planning and budgeting
- Offering financial advice
- Advising the association on how to save money
- Maintaining records and ensuring their accuracy
- …and more.
Get in touch with Luxury Property Care to learn about our association management services. We’ve been helping hundreds of property investors in South Florida with their COAs and HOAs for over a decade. With us by your side, you can ensure that your association’s financial health is in check.