Homeowners associations (HOA) are likely to make ‘rookie’ mistakes. After all, the members of the association often aren’t real estate professionals. So, unless a property management company is handling your HOA or condominium owners association (COA), it’s bound to face a few challenges, particularly with finances.
How to Avoid Making Mistakes When Budgeting
The HOA board of directors gets together annually to discuss the coming year’s budget. They consider the anticipated costs (e.g. maintenance, security, etc.) to calculate how much they will collect from homeowners. However, HOA boards need to know is that budgeting isn’t based on guesswork. Board members shouldn’t base the coming year’s budget only on their current budget. That’ll only lead to poor budgeting, which will force them to cut corners down the road. It’ll also anger homeowners who expect the board to be experts at what they’re doing.
If you don’t want to encounter problems down the road, be sure your budget is realistic. To do that, steer clear of making these rookie mistakes:
#1 Don’t Create General Categories
The HOA budget needs to be as detailed as possible. Because of the amount of work, board members tend to take the shorter route. They end up “bundling” their costs into broad categories, instead of getting into the nitty-gritty. For example, HOAs that expect to hire service providers (e.g. plumbers, electricians, landscapers, etc.) shouldn’t group them together as a single expense. Instead, they should create individual categories for each of the vendors. Itemizing keeps you organized.
#2 Factor in Inflation
There’s a reason why your HOA shouldn’t collect the same dues each year. If your HOA doesn’t factor in inflation, it’ll be forced to forego essential repairs. Each year, the cost of goods goes up, so it’s natural that you should raise the HOA dues, too. In other words, what you paid your plumber now won’t be what you pay them down the road. If you’re worried about complaints, be ready to help the homeowners understand why the dues need to be raised.
Pro Tip: Alternatively, you could hire an association or property management company to help you convince the homeowners that the raise is essential.
#3 Don’t Forget About Debts
A self-managed association shouldn’t forget to count the HOA’s bad debts. The following year’s budget should be able to pay off the HOA’s obligations without being underfunded. Allocate a certain amount for unpaid dues until you can collect them. Furthermore, your HOA should learn how to handle its finances well, in the first place. If your HOA has members that are too easily tempted to spend, hire an association manager.
#4 Don’t Be Afraid to Negotiate
This is why your HOA board should have a pro negotiator. When hiring new contractors, don’t be afraid to negotiate better deals or discounts. If your current contractor charges your HOA too high, consider replacing them. Keep in mind, however, that keeping costs down doesn’t have to come at the expense of excellence. So, look for a vendor that can deliver the same services. If you’re hiring an association manager, you can take advantage of their vendor network to keep your costs down.
#5 Create a Strong Fee Collection Process
An HOA is considered a non-profit. It relies on fees which are collected from homeowners. A poor fee collection process can drastically affect your HOA’s finances. After all, if one homeowner is allowed to pay late, what’s stopping other homeowners from paying late, as well? To be able to pay for upkeep, make a fee collection process to encourage homeowners to pay on time. Alternatively, you can opt for property management technology to provide homeowners with a variety of payment options.
#6 Don’t Get the Cheapest Insurance
Having a proper insurance policy can save you. HOAs tend to choose the cheapest insurance because they think it’s the best way to keep costs low. Unfortunately, this couldn’t be farther from the truth. In case your HOA needs to file an insurance claim, it’ll have insufficient coverage. It will have to use the funds in its reserve fund. Hence, it would be wise to pay for a pricier insurance policy that offers sufficient coverage. Remember, it’s better to be prepared.
#7 Not Setting Aside Reserve Funds
Going back to the previous point, make sure your HOA has a reserve fund. The reserve fund covers the cost of repairs, restoration, etc. of common areas such as community pools and playgrounds. If the reserve fund is underfunded, your HOA will be forced to forego critical repairs. Plus, in case of emergencies, your HOA will use the funds that were initially allocated elsewhere.
#8 Not Considering Emergency Costs
Another budgeting mistake is not taking emergencies into account. Your HOA should consider “surprise” costs, otherwise, the rest of the community’s finances will suffer. For example, the HOA should set aside funds in case it has to hire extra security. As a rule of thumb, the HOA should plan for both the expected and unexpected.
#9 Not Reviewing the Previous Year’s Reports
Budgets are partly based on the past year’s reports. So, before crafting the budget, your HOA should revisit the previous year’s reports to see how well (or how poorly) they did. Previous reports can also help you anticipate future costs. For instance, if you find that your reserve fund is insufficient, consider raising the association fees. Reviewing previous reports can help you prevent making the same mistakes.
Your HOA-governed community won’t survive if it doesn’t have sufficient funds. The HOA board has to undertake the exhausting task of carefully crafting the budget, based on expected expenses and external factors such as inflation. However, there’s still a risk of committing mistakes. But by keeping the tips above in mind, you can plan your budget properly, and create one that actually meets your community’s needs and demands.
If your multi-family property’s HOA or COA is having a hard time preparing its budget for the upcoming year, Luxury Property Care is here to help. Call us at (561) 944 – 2992 or contact us online to learn more.