The HOA budget is a critical tool for financial success. But, so many things can go wrong right from the planning phase of your annual budget. Learn how to avoid the most costly HOA budget planning mistakes below.
The Worst HOA Budget Mistakes and How to Avoid Them
Every year, the HOA board meets to plan the annual budget. They do this by anticipating the expenses for the coming year, which will then be used as the basis for the calculation of monthly homeowner dues.
HOA budgeting, though, comes with its own challenges. Board members should not simply slap in some arbitrary numbers and call it a day, nor should they keep reusing the same budget for years on end without proper examination. Poor budgeting will inevitably lead to funding issues, which will then either force the board to cut drastic corners or levy special assessments.
If you want a financially healthy association, it all begins with the budget. To craft a well-researched and realistic budget, it is essential to steer clear of the following mistakes.
1. Lumping Expenses Together
A good homeowners association budget is comprehensive and detailed. For this reason, a lot of boards feel burdened by the amount of time and work required to prepare one. As a result, they tend to lump expenses together in a single broad category instead of diving into the nitty-gritty details.
For instance, if you expect to pay for landscaping services, electrical repairs, and plumbing in the coming year, don’t just group them all together under a “maintenance” category. Instead, itemize your expenses so that you can assign a budget for each one. This way, you won’t overlook any line items and you can ensure every expense is accounted for separately.
2. Not Reviewing Past Financial Reports
Every good budget is based on the previous year’s actual expenses. Costs can change from year to year, so reviewing your past financial reports is a great way to anticipate future expenditures. This practice also helps you avoid committing the same mistakes year in and year out.
3. Failing to Add a Buffer
Many boards forget or decide against adding a buffer within their budgets. This may stem from a desire to keep costs low when preparing their annual budget so that residents remain happy. But, this type of thinking can land you in hot water with your finances.
It is important to cushion your budget and allocate a little more than what you expect to pay. This way, when you face surprise costs, you have a little breathing room and won’t be forced to turn to special assessments to cover the cost. Plus, it’s always better to have more money at the end of the year than to be in the negative.
4. Being Stingy With Insurance
Insurance is essential to the financial success of every homeowners association. When you encounter costly claims, insurance can soften the blow and save your HOA money. Yet, far too many associations skimp on insurance.
Settling for the cheapest policies can result in insufficient coverage in the event of emergencies, liability claims, or disasters. Even though you may never end up using it (good for you), it is infinitely better to purchase adequate coverage than have nowhere to source funds to pay for damages.
When preparing your HOA budget, make sure to review your current policies and determine whether you need to update your plans. Don’t be afraid to change insurance providers, too, especially if you can no longer afford your current one.
5. Forgetting Reserve Contributions
HOA reserve fund accounting is a big part of budget planning. Remember that your reserves are there for a reason — to cover future major repairs, replacements, and maintenance. And failing to set aside money for your reserve fund will ultimately leave future boards with a huge financial burden.
6. Failing to Negotiate With Vendors
When the budget season rolls around, association boards should sit down and re-evaluate their vendor contracts. If any contracts are up for renewal, make sure to ask your provider if there are any changes to the cost of their services. Inquire about any discounts you’re eligible for. You can always negotiate with vendors or look for a new one if your current one is unsatisfactory.
7. Ignoring Outstanding Debts
Your HOA budget should reflect all of the association’s financial obligations. Therefore, it is imperative that you check for any outstanding balances or unpaid invoices (including any accrued interest). Once you identify these, make sure to factor them into your budget. This way, you won’t be surprised when someone comes to collect your debt and leave your HOA with a deficit.
8. Forgetting Delinquencies, Liens, and Foreclosures
Associations earn income through homeowner dues, fees, and assessments. But, when there are many delinquent owners, your source of income takes a beating.
Let’s say you need to charge each owner $400 to meet your year’s budgetary needs. If there are five delinquent owners, that’s a loss amounting to $2,000. That means you can’t pay $2,000 worth of expenses and you will have to get that money from someplace else. For most associations, that place is the pockets of dutiful homeowners in the form of special assessments.
If you expect a lot of delinquencies or foreclosures, it is a good idea to pad your budget a little more to cover for any shortfalls. You should also consider working on your collection methods, perhaps even hire a collection agency or start offering payment plans to financially struggling residents.
9. Not Accounting for External Economic Factors
While a significant portion of proper budgeting requires you to look inward, there are also certain external economic factors that can affect your finances. Inflation is a big one, and so are changing wages and tax rates. The cost of materials and services can also shift and impact your budget. Increasing unemployment rates can lead to more owners defaulting on their payments.
As a board member, it is part of your job to study these factors and take them into consideration when planning the budget. You can also create a separate budget committee to conduct the research and provide you with a report.
The Key to Better Budget Planning
The HOA budget serves both as a tool for calculating homeowner dues and as a guide for the association’s expenses. In the process of planning it, though, there is always a risk of committing errors. The first step to avoiding these errors is to know what they are. Armed with this information, you can now properly and effectively plan your budget.
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