Six steps to help your homeowner association’s board prepare the annual budget.
Every business needs a budget to operate; your homeowners association (HOA) is no different. A budget affects the ability to maintain your community, make repairs when needed and set money aside for future, larger repairs or replacements. Without a proper budget, your home investment could decline, and the need for special assessments could increase. Here are six steps for your HOA’s board to help ensure your community has a functional budget in place.
Step 1: Review past budgets, income and expenses.Take a look at the previous two to three years worth of budgets as well as the actual numbers for income and expenses (versus budgeted). Doing so will help you spot trends and determine how to budget for the upcoming year.
Step 2: Assess vendor contracts and ask for expected cost increases.Call your current vendors to see if they plan to increase rates. Also review current contracts to determine if any clauses allow for annual increases. If the contract is up for renewal, request bids from other companies to help lower or maintain costs. And don’t forget to call your utility companies as well—you can generally expect these costs to increase, which needs to be factored into your budget.
Step 3: Fund your reserves.If your HOA hasn’t completed a reserve study , now is the time to consider it. (Be aware that some states require it.) This will help current and future boards determine which repair or replacement projects are most urgent and whether monthly dues must be increased to help cover future expenses.
Step 4: Determine upcoming projects.Review your reserve study for a sense of which (if any) projects must be tackled quickly. Anything potentially unsafe or structurally unsound would top the list. Then review the amount of money your HOA currently has in its reserve fund. This will help you understand whether monthly dues must be raised to cover costs. (If you can’t raise monthly dues, a special assessment may be necessary.)
Step 5: Budget for “hidden” expenses.That insurance deductible charged per building? You need to ensure you have enough in your community’s savings to cover it should you suddenly need to replace your roof(s) or repair other damage. You likely won’t see this expense on past years’ budgets, so be careful to keep it in mind.
Step 6: Set monthly dues for homeowners.Now that you have the legwork done, review your estimated monthly expenses—including funding your reserves and hidden expenses. Your total projected operating expenses plus annual contributions to your reserve fund will show the annual income needed from homeowner dues or other sources. Take that number and allocate it as required (by percentage ownership or split equally) to each homeowner as the new monthly fee.
Now that you have a final budget, it’s time to communicate it to your homeowners. Be sure to provide detail on how the board came up with the budget, highlighting how any increase in fees will help maintain and improve the homeowner’s investment over the long run.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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