As the year winds down, many businesses shift their focus to future and begin preparing next years annual budget. HOA and Condo Associations are no different as we are currently wrapping our budget season for this year.
We have prepared thousands of community association budgets over our 30 years and have developed some specific strategies for preparing an accurate HOA budget. We have come up with:
Do a budget – I know this seems like a silly tip, but we have seen many associations fail to create a budget before proceeding to the next year. An HOA is just like any other business or organization. If you don’t have a financial plan, you will find yourself a in a mess about halfway through the year when you realize that you don’t have enough funds to make it through the entire year. Take the time to practice financial responsibility for your association.
Review budget and Financial History – You always want to review the previous two years financials to fully understand were you currently are vs. where you want your association to be . Many people review previous year’s budgets to prepare future ones. One problem we see is that many people despite reviewing past numbers, fail to make the proper budget corrections when something is way over or under budget from the previous year. Make the proper adjustments to insure an accurate budget.
Prioritize projects – We have worked with any HOA and condo associations that get overwhelmed during budget time because they have so many repairs and projects that they want to handle all at once. Any kind of future projects or repairs, need to be prioritized accordingly. This is where you must separate your associations needs vs. wants. Everyone wants the landscaping or condo exteriors to look immaculate, but no one gets excited repairing an unsafe stairwell repairing a leaking sprinkler system. You must eliminate any safety or potential liabilities before exploring any community beatification projects.
Utility Increases – We can’t recall a time in which utility costs actually went down from the previous year in our 25 years plus experience. Water, gas, and electricity costs have been increasing steadily over the last decade, especially water costs over the last 2 years. We always research our local city and municipalities to see if they have a price rate schedule available. For example the City of Austin is scheduled to increase water costs 70% over the next five years. Because we are aware of this price hikes, we obviously budget for them accordingly. If no information is available, we suggest increasing the budget on most utilities between 5% to 7% each year.
Vendor Contracts – You always want to insure the correct budgeting for all of your normal monthly service providers. Don’t be afraid to ask your landscaping company, pool contractor, and even management company, if they plan on changing their current rates. This is also a great opportunity to ask for their updated insurance information to make sure that is good standing as well. Also review current contacts to see if there are any CPI index clauses in their agreement. Nine times out of ten, if they are contractually able to increase their fees, most will do so.
Budget for reserves – All associations should budget for a percentage of all income to go to their reserve or savings accounts. The percentage of income will of course vary depending on your association. The more long term liabilities and obligations you have, the more you should be putting away. We have some condo associations that are putting away as much as 20% of their total income towards long term savings. Condos generally have much larger financial obligations including exterior repairs and upkeep and maintaining private streets and roads. Not budgeting for reserves can lead to be big problems and potentially big special assessments down the road.
Cover your Insurance deductibles – All condo associations need to pay special attention to this one. Make sure you are aware of the deductible levels for different elements of your complex. For example, if your roof replacement deductible is $500.00 per building and you have 20 buildings, then you need then or course you always need at least $10,000 in your reserves to cover that amount. If a disaster or violent storm strikes your area, you want to make sure your association is ready and that you are not hitting them up for a special assessment just to cover basic insurance claims.
Evaluate legal and collection costs – Legal and collections costs can escalate very quickly depending on the collection strategy that you use. Evaluate your current system and see if you can determine your return on investment. If you are on average spending $150 dollars to collect every $100, then something obviously isn’t working. We have experienced great success with providing homeowners that are behind with a payment plan with full payment schedule provided to them. When delinquent association members concentrate on affordable monthly payment and not the large amount that they owe, they tend to see the light at the end of tunnel.
Special Assessments are for special projects – We have heard many times suggested “Why can’t we have a special assessment instead of raising our monthly dues?” This philosophy doesn’t work in our book. If your association is having a problem meeting it expenses because of some tight cash flow, you need to raise your assessment amount or your assessment frequency. Special assessments are just that, special. They are not for paying your bills. They are intended for major improvements, or in a case of emergency repairs, not to pay the pool contractor.
Stay the course – It’s real easy to get distracted throughout the year with landscaping improvements, new and improved security systems, and other random projects throughout the year. Your association made a budget for a reason, so try your best to stick to it as best you can. If you do have to make an unexpected expenditure, take your time and make the best decision for your HOA or condo association.
Creating and maintaining an HOA budget is essential part of maintaining a fiscally responsible association. Even associations that are not as healthy financially as they need to be, with some small modifications, they too can be financially fit in just a short amount of time. If you follow some basic steps and continue to evaluate and adjust over time, your community association will thrive financially now and in the years to come.
