Making and sticking to a budget is not a hard concept for someone to understand. You bring in X amount of dollars each month and you have X amount of bills to pay. The amount of your income is spread out to cover your monthly expenses. Theoretically your income determines the expenses you can afford, although in America we tend to take this too far. But your HOA Board doesn’t have to!
The HOA accounting process is reversed from the typical American’s individual household budget. When an HOA board is determining the budget for the homeowners association, first the expenses are estimated and then the source of revenue is determined, a big chunk of which is the amount of HOA fees charged to residents.
If the HOA fees are determined first because the Board wants to keep the fees low, and then a budget is made, it can create some serious shortfalls in the HOA accounting process. This starts a domino effect – if the HOA Board has under-budgeted, then it affects the accuracy for next year’s budget.
The Board also may be forced to dip into the reserve fund that is supposed to be saved for future repairs and replacements needed in the Association, causing a shortage in reserves. It can also result in enforcing special assessments among homeowners and deferred maintenance in the Association.
So how can you avoid triggering that first domino? Start with getting back to basics.
Awareness of Your Operating Budget
Take a look at the previous three year history of your Association’s budget. Examine each line item and what the actual cost was, not what was budgeted. This will help you see your HOA accounting trends that you might not have known were there. Then, think about possible future changes. For example, you could give your utility company a call to ask about any expected rate increases.
Budgeting HOA Fees
Determining the cost of your HOA fees is simple mathematics:
Total Operating Expenses + Annual Reserve Contribution / *percentage of ownership = HOA fees
*This figure could also be divided equally – it depends on your homeowners association's governing documents.
If the fee amount is close to last year’s, then your budget is probably in good shape. If however, you need to increase the fee to help take care of the Association costs then this is the opportune time for the HOA board to revise the budget and implement a new fee.
Contribution to the Reserve Fund
This is quite possibly the single most important part of your HOA accounting because it provides the long term plan for the Board to follow and can save you from having to increase HOA fees or implement special assessments.
It’s like saving for a rainy day - and the thing about a rainy day is that you can be sure it will come! So will repairs and replacements in your Association for things like roofs, painting, paving, and other areas that the Association is responsible for maintaining.
If your Board isn’t sure how much should be in the reserve fund or how much should be contributed, consider conducting a reserve study or hiring a management company to help.
As an HOA board member, you want to do what’s in the best interest for the homeowners in your association. Start by checking your governing documents and review your annual budget to see where your association stands. It’s never too late to make sure your HOA accounting is on track.