When it comes to the changes in our HOA communities, it may be easy to assume that Covid-19 had the highest impact on many HOA budgets. Yet, according to a survey conducted by FirstService Residential in August of 2020, it was shown that “44% of surveyed board members said that the COVID-19 pandemic had not impacted their association budget.” It was found that “many boards are forward-thinking and have adapted well to the challenges.” On the contrary, 35% of board members said “the COVID-19 pandemic is negatively impacting their budget,” and 21% are not sure how it would affect their new budget.
What is an HOA budget?
When it comes to planning your HOA budget, it goes without saying that your HOA residents’ needs should always be your #1 priority. The purpose of the budget is to provide an HOA with the opportunity to improve its financial health and the overall community. The HOA budget is created to maintain the HOA’s financial quality of living and the communities well being.
“Before anything else, preparation is the key to success” – Alexander Graham Bell.
To better help you prepare your 2021 HOA budget, we would like to establish some ground rules and suggestions so that you are adequately prepared to start your year on the right foot.
No one likes a procrastinator. As an HOA headed into a new year, there will be many responsibilities and evaluations to take place while planning your budget. By allowing yourself ample time to schedule meetings and evaluate your account, your HOA will likely result in a successful and robust year. Keep in mind that you may also be required to meet with other HOA board members that will want to have input during the evaluation process.
2. Be fair:
Communication is critical. Out of respect for other board members, be sure to allow other committees a reasonable amount of time to prioritize their schedules to communicate any necessary topics of discussion related to the budget.
If Covid-19 taught us one thing, communication is essential to our survival. If your HOA currently uses virtual tools to communicate, be sure that all members are well aware of this rule. Keep in mind that there may be some members that may not be as up-to-date with technology. To help, offer assistance to help them set up any virtual technologies that may be needed during the process. Also, consider sending a guideline that provides all members with a scheduled plan related to the budget — this includes instructions on how to view the budget once completed. A contact list and hierarchy list of names could also be a valuable tool for anyone that may be questioned on who to contact for specific questions or tasks.
4. Evaluate your HOA governing documents:
Preparing and reviewing any governing documents will be vital in creating your HOA 2021 budget. During this process, be sure to review all updated and current governing records related to the HOA’s annual budget. As a reminder, always check for any new guidelines for executing your budget so that you comply with all HOA rules and laws. Some HOAs may also require you to obey specific rules regarding notifying your HOA community of the new budget.
5. Evaluate open projects and HOA history:
When creating your budget, you may come across available tasks or essential financial responsibilities that will trickle into the new year. Before beginning your budget, be well informed of all open projects that may fluctuate your HOA budget. By reviewing your HOAs history, you will be able to pinpoint items that may have been out of line with the current budget.
Create a vital budget transparency
As a classic rule of thumb, always remember that your HOA budget should always start and end with your homeowners’ consideration in mind. A critical aspect of doing this will come with providing your HOA with clear budget transparency.
What’s the purpose of budget transparency?
The sole purpose of budget transparency is to encourage members to engage in their community’s organizations and activities. Transparency provides the community with an accurate and full disclosure of information within the HOA community. As a result, members can build trust, limit miscommunication, and prevent the so-called “rumor mill.”
What else can our HOA do to help build budget transparency?
- Form a budget committee: Building a budget committee can be a great way to add homeowner input and process transparency. A committee such as this can facilitate and organize the proper channels of communication among HOA members and different committees that may not be as related to an HOA budget.
Top 10 HOA 2021 Budget Essentials
Now that we have identified some areas of importance with preparing your 2021 HOA budget, let us guide you in focusing on ten crucial HOA budget essentials and topics.
One large part of building your budget will be with existing vendors. If your HOA is considering adding new vendors, it may be tempting to seek less costly bids from vendors to save on cost. Yet, when you opt for a more experienced vendor, your HOA will prosper the reward and profit from their ability to provide you with more opportunities in the end. To help evaluate, consider reviewing your list of vendors that may have a higher impact on the community. Keep in mind the following questions and discussion points:
- Does your HOA have any current vendors that are open to revisiting your contract for the opportunity to receive an additional discount?
- Who are your most successful and profitable vendors?
- Did Covid-19 impact any of your current vendors??
- Does your HOA have any current vendors that plan to increase their yearly service fees or rates?
2. HOA maintenance and utilities:
As many HOAs know, keeping up with the care of an HOA can be costly. Maintenance and upkeep will be an essential part of creating your new budget. Here is where historical data will be most resourceful and helpful to you in planning your budget. The purpose of utilizing your historical data comes with identifying areas of opportunity and seasonal trends. Consider researching the following questions:
- Did you see any increases or decreases in the cost of maintenance during Covid-19?
- Was the community able to be productive with this setback in available maintenance, and by how much?
- Do you anticipate your cost of maintenance and utility usage to go back up as regulations begin to allow the community to venture out and open up facilities?
3. Reserve contribution:
Also known as capital projects, an HOA reserve fund is a portion of collected HOA dues set aside for major financial expenditures. Examples include extensive landscaping, construction work, gym maintenance and repairs, playground installation, or any significant expenses that would significantly impact an HOA budget.
- Best practices: Most often, HOA reserve funds may have specific criteria on how each reserve can be implemented based on your community HOA rules and bylaws.
- Reserve study: A useful tool known as a reserve study can solidify an HOA’s needs. It is recommended that HOAs conduct a reserve study at least every 2-3 years. With the recent changes due to Covid-19, many HOAs have seen several economic shifts. Reserve studies may also help provide more accurate projections for the budget shortly.
4. Unexpected expenses:
Another part of planning your HOA budget will be unexpected expenses, better known as contingencies. It will be vital to set a portion of funds aside for any costs that insurance may not cover. For example: consider any substantial changes that may occur with homeowner delinquencies, unpaid HOA or legal fees, or even insurance costs adjustments.
5. HOA Fees:
HOA fees are typically an enormous asset to creating your HOA budget. Fees can help with covering several costs such as amenities, insurance, and much more. On average, around 25% – 40% of HOA fees should go toward your HOA reserve fund.
6. HOA Delinquencies:
For most HOAs, it is familiar to average anywhere from 3-5% in HOA delinquencies. Keep in mind that anticipated delinquencies should be considered as a bad debt expense when planning your budget.
Depending on the size of your HOA community, your cost of landscaping could take a large percentage of your budget. On average, HOAs are known to spend anywhere from $45,000 to as high as $100,000 on landscaping projects per year. Keep in mind that the cost of paying for landscaping will be proportionate to the amount of time that a professional spends on your property. Other factors in determining the value of landscaping will come with the amount of green space available within the HOA, the inclusions, and enhancements that your HOA community may want to include in the new year.
8. Insurance premiums and deductibles:
HOAs will often include the cost of their annual insurance premiums and deductibles in their annual HOA budget. Suppose your HOA experiences an emergency or disaster in the situation. In that case, it will be vital to have a plan-of-action on how to execute a solution and cover the cost of any insurance claims that may occur.
9. Software cost:
As more sources of technologies continue to thrive during the time of Covid-19, many HOA communities have begun to incorporate more software capabilities into their HOA community. If your HOA currently runs a website or HOA management software, be sure to take into consideration the cost and tools needed to run these systems. Depending on the HOA software level, monthly fees can range anywhere from as low as $45 a month for a standard plan to as high as $600 a month for a more advanced method.
10. Rising costs of services:
On average, HOAs can expect anywhere from a 5%-10% increase in price or services throughout the year. Just like any business, Inflation will affect a large part of your HOA operating cost. A few examples include electricity, maintenance for supplies, or even the cost of insurance.
Disclaimer: This article is provided for information purposes only and does not constitute legal advice.