Homeowners associations often rely on HOA fees as their main source of income. However, delinquencies and economic downturns can often make HOAs unstable or unable to make ends meet with just HOA fees. How can HOAs remain financially healthy despite economic hardships? The answer: through HOA fundraising activities.

 

HOA Fundraising Ideas for a Financially Healthy Community

Homeowners associations have many options to get extra cash to cover their expenses. They can raise HOA fees, levy special assessments, or obtain an HOA loan to cover the costs. However, while these strategies may be helpful, they are not always feasible or acceptable for the community residents.

What can the board do, then? One good idea is to raise the community’s income by hosting HOA community fundraisers. Here are some ideas HOAs can consider.

 

1. Culinary Events

HOA fundraising programs do not have to be boring or burdensome for the residents. They can even serve as community bonding activities. One good idea is to host culinary events like potlucks and cookoffs in the spring or fall.

In a cookoff, homeowners can register as chefs or attendees to taste the meals prepared. The HOA can charge the chefs to register and charge the attendees upon entry. During the event, people from all over the neighborhood — or even those outside the HOA — can come and taste food from various home cooks.

Meanwhile, the cooks and chefs can even sell some of their dishes to the participants. It’s a win-win because both the chefs and the HOA can raise funds. The HOA can even invite bands, food stalls, and other outside vendors to the event for more proceeds.

If the HOA is strict about outside visitors, they can also throw a potluck. Residents can bring a dish of their choice and pay a small fee to enter. Those who want to attend without bringing a dish can pay a higher entry fee.

 

2. Amenity Rentals

Many HOAs provide amenities like parks, gyms, pools, and co-working centers. Consider renting these out as part of HOA fundraising. The money HOAs can make from renting them out can be significant, especially if the amenities are nice or the HOA is in an area with high demand.

In addition, HOAs can host events in these amenities like camps and courses. For instance, they can invite schools to host a camp in the community park and clubhouse. If there are no schools in the area, the HOA can host an adult learning program like a gardening or cooking class.

Alternatively, HOAs can rent out the clubhouse for small events like birthday parties or class reunions. Consider advertising the space in local newspapers or social media.

 

3. Game Nights

HOAs can host game nights and charge a small entry fee. For example, the board can host bingo, poker, or board game nights every Thursday for the community residents. These games are fairly low-maintenance and can bring a lot of income, especially if they’re hosted every week.

However, make sure to check state law before hosting anything gambling-related. State laws may vary when it comes to gambling regulations. For instance, Flordia law allows penny-ante games wherein winnings for each round do not exceed $10. However, a person cannot receive commissions for conducting the game in their dwelling.

 

4. Festivals

HOA festivals are fun and lively events that invite people from all around the area to the community. The board can invite food vendors, game stalls, and local craftsmen to the event. They can then sell their goods and services during the festival. Moreover, the festival can have a highlight event like a battle of the bands or a silent auction.

Hosting festivals is a great way to raise funds while also supporting local artists, craftsmen, and businesses. The HOA can even prioritize residents who want to participate. It also fosters a better sense of community for the residents living there.

 

5. Sporting Events

Athletic activities are a great way to bring the community together while also raising some funds on the side. Consider hosting a sporting event where residents can participate in various sports for a small fee. The event can include sports like basketball, tennis, badminton, and even marathons or walk-a-thons. HOAs can also invite other vendors, like food or drink vendors, to raise more funds.

In addition, the HOA can incorporate other ways to raise money during the event. They can host a text-to-give donation event where residents and participants can donate what they can from their phones. Raffles are also a good way to convince participants to stay until the end of the event, thus driving more traffic and sales. Participants can purchase a raffle ticket for a chance to win a good prize.

 

6. Online Shopping

HOA fundraisers don’t always have to be physical. In fact, an online shopping fundraiser can sometimes be enough to cover additional expenses. The HOA only needs to partner with an online platform where people can purchase goods and services. Retailers can join in and post their listings and products through the platform. The HOA then gets a cut from every purchase made on the website.

 

7. Converting Unused Parking Lots and Buildings

Some HOAs may have unused parking lots or buildings that they can convert into a profitable business. For instance, if there’s a lot of unused land in the area, consider converting it into a pay-parking space. Outsiders (or even the residents’ guests) can pay for parking. It’s a good idea if the HOA is near any commercial establishments or offices.

Meanwhile, empty buildings can be converted into storage units used by the community residents. It’s a great way to put the building into good use without too much preparation or overhead.

 

8. Install Vending Machines

Vending machines can make the HOA a decent amount of extra income without breaking the bank. The community only needs to install them at convenient, high-traffic spots near the gyms, pools, or clubhouses. Vendors are often more than willing to pay a fee to use these spaces.

The HOA can also purchase vending machines and manage them in-house. They can cost anywhere between $1,200 to $10,000, depending on the model. The board should conduct a cost-benefit analysis to ensure they purchase the right one.

 

Prioritizing Financial Stability

At times, HOAs cannot rely on fees and assessments alone. Homeowners associations can host HOA fundraising events to ensure financial stability. It’s especially useful during economic downturns or when there are a lot of delinquencies in the community.

Condo Manager is an all-around HOA management software for both HOA management companies and self-managed neighborhoods. Call us today at (800) 626-1267 or get in touch with us online to request a demo!

 

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Managing HOA reserve fund accounts is not easy. Done poorly, homeowners associations can easily deplete their reserves to cover other expenses. However, maintaining ample reserves is crucial to financial health. The community might suffer bigger losses if it foregoes proper reserve fund management.

 

Best Practices for Managing HOA Reserve Fund

No matter how well you prepare for it, emergencies happen to the best of us. HOAs might face lots of different crises like earthquakes, fire, or acts of terrorism. In these cases, one way to protect the community financially is to maintain ample reserves. Here’s what you need to know about how to manage HOA reserve fund accounts.

 

1. Perform a Reserve Study Periodically

What is a healthy reserve fund? There is no universal amount recommended for all HOAs. It truly depends on several factors, such as the HOA’s size, amenities, and exposure to risk. To determine a specific community’s ideal reserve amount, conducting a reserve study every few years is best.

A reserve study is a financial analysis performed by a reserve analyst or specialist. The conductor examines the HOA’s foreseeable capital improvements, upcoming repairs or replacements, current reserve accounts, and the condition of all HOA property. Based on these factors, analysts recommend how much the HOA should keep in its reserve account.

Reserve studies are not one-time events. In many communities, the CC&Rs or Bylaws require the board to conduct them every year or every few years. Even without these requirements, though, it’s usually a good idea to conduct the study at least once every three years.

 

2. Set a Goal

How do you account for reserve funds? After conducting a reserve study, the HOA may aim to maintain a certain percentage of the ideal reserve funds to remain healthy. Ideally, reserve accounts should be fully funded. However, maintaining a 70% funded reserve account should be a decent level to aim for if the community is underfunded.

The HOA can slowly work its way toward the goal. Board members may increase the assessments incrementally to achieve their desired funding. This way, the residents won’t face sudden hikes in HOA fees.

 

3. Create a Separate Account

Homeowners associations tend to combine funds in one bank account. However, this is not a good idea when it comes to managing HOA reserve fund accounts. An HOA that does this risks accidentally dipping into the reserves when it isn’t necessary.

Instead of mixing the funds, consider other avenues, such as other banks or money markets, to ensure the reserves are untouched and still earn interest. HOAs can also invest in certificates of deposit (CDs) with varying maturity intervals.

 

4. Look for a Secure Place

Regardless of where the HOA keeps the funds, the board should ensure that it’s secure. HOAs can consider banks and institutions with Federal Deposit Insurance Corporation (FDIC) protection. Keeping the reserve funds within the FDIC limit is also good practice.

HOAs may also create deposit accounts in institutions with experience running community association deposits. For example, services like the IntraFi Cash Service (ICS) network allow HOAs to distribute their reserves among several banks to ensure they’re all protected by FDIC coverage. Despite having multiple banks, the HOA only works with the ICS to manage its reserves.

 

5. Prioritize Return and Liquidity

Accidents happen, so HOA reserve funds need to remain liquid. The board should be able to easily access the funds should any unforeseen expense occur. In addition, the board should consider interest or returns. The reserves shouldn’t just remain safe, depreciating in value. That’s a bad business practice.

Instead, the reserve account should earn ample interest to keep up with inflation. While security and liquidity come first, earning interest should also be a priority. The board should build a good relationship with their bank or institution of choice. That way, they can assist the HOA and explain their options for increasing the reserve funds.

It’s also a good idea to periodically review the interest being earned on the current reserve accounts and inquire about any new programs that might yield higher interest. These offerings will vary by bank and account terms, so make sure to ask them every now and then.

 

6. Be Transparent in Accounting

Homeowners associations must be transparent about their financial practices and decisions. The residents might not like it when the HOA has to increase their fees to account for the reserves. Nevertheless, they can understand more if they see why the community needs the money.

The board should always communicate the purpose of the reserves. In fact, they can even discuss the reserve study results with the community members so they have a clear idea of the HOA’s current standing.

Apart from this, it’s equally crucial to separate regular assessments from reserve contributions in the account books. Noting each item separately in the income sheet can paint a more accurate picture of the HOA’s current status. Homeowners can also more easily see where their money is being spent.

 

7. Educate the Board

HOA board members are not always legal or financial experts. They rarely have financial or legal backgrounds. Hence, they might not know why the reserves are important and how to manage the funds wisely. HOAS needs to educate the board members about proper reserve fund management.

In addition, HOAs should review the legal or regulatory requirements regarding reserve funds. For instance, California HOAs are required to conduct reserve studies regardless of size unless the replacement costs are below 50% of the HOA’s gross budget. Keeping regulations in mind will ensure the HOA operates at full capacity and protects it from liability. It may be wise to ask an HOA attorney for help in board education.

Similarly, HOA board members must know how to read financial statements, understand reserve studies, and handle HOA banking. They may ask an experienced accountant for help or attend workshops to learn the ropes.

 

For the Community’s Protection

Managing HOA reserve fund accounts can be difficult for inexperienced board members. Nonetheless, the time and effort it takes to learn what to do and how to maintain ample reserves will pay off. A fully funded reserve account can save the HOA from financial crises during emergencies and rainy days.

Condo Manager is the best community association management platform for self-managed associations and HOA management companies. Contact us online or at (800) 626-1267 to learn more!

 

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HOAs are responsible for managing the community’s funds. The board allocates the funds to maintenance, operations, and regular services. However, there are times when the HOA requires more funds and takes out a loan. This can be useful in several ways but it’s also a problem if the HOA defaults on its payments. How does it affect homeowners when the HOA is in debt? What are the options?

 

What is an HOA Loan?

An HOA loan is a distinct financial product offered by banks and creditors to qualified community associations. For the most part, HOA loans do not require individual credit checks, real estate collateral, or personal guarantees. Instead, the debt is secured using the community’s regular assessments. The lender provides money based on the HOA’s financial profile.

Homeowners association loans are usually secure. Banks and lenders use various tools to assess the association’s ability to repay the debt. However, there are times when an HOA defaults on a loan. In this case, the lender has no choice but to use other means to collect the principal and interest.

 

What Happens When the HOA is in Debt?

Like all organizations, homeowners associations may sometimes take out a loan to finance operations, expecting to earn back the money through income. The board may raise dues, levy special assessments, or find alternative sources of income to pay the money back.

However, several things happen when an HOA becomes delinquent. Lenders typically try to work through short-term issues during the initial stages. The lender may understand if the HOA is facing a problem with changes in its accounting. They may also be more patient if the cause is a change in board members or management companies.

However, the bank or lender will take legal action if an HOA fails to pay its loan for several months. They will ask the courts for a judgment to collect the HOA’s monthly dues. This means the lender will have the first right to monthly payments before returning what’s left over to the HOA. Hence, the homeowners’ payments will go straight to the lender instead of maintenance, capital improvements, or operations. The legal system will designate an account where future dues will end up.

As a result, the homeowners association will have to operate at a reduced cash flow. The HOA’s regular services and operations, like landscaping, snow removal, or garbage collection, may suffer. Sometimes, the HOA may even file for bankruptcy to repay the debt. Regardless, the homeowners will be the most affected by the default.

 

Can HOAs Still Sell Homes?

Homeowners associations may still sell homes or even purchase property while it’s repaying the loan. The community’s daily life will likely continue, albeit with fewer services and perks. Moreover, the homeowners’ credit scores and home mortgages will not be affected even if the HOA is in debt. Lenders cannot collect homeowners’ properties as they are not put up for collateral.

 

What Causes an HOA to Default on a Loan?

Banks and lenders rarely approve a loan if they think the HOA is unqualified. However, even an HOA in good standing can default for several reasons. If your community is considering a loan, be careful of the following pitfalls.

• Delinquencies. Homeowners may fail to make monthly payments and default on their assessments. While the HOA can take measures to reduce delinquencies or collect unpaid debt, unexpected delinquencies may cause the community to default on its loan payment.
• Poor Planning. HOAs without a clear financial plan may have trouble paying back the loan’s principal and interest. The HOA may also spend money on items that won’t provide a return on their investment.
• Misuse of Funds. The HOA board may misuse the funds for frivolous spending or personal gain.

 

Can the HOA Declare Bankruptcy?

Homeowners associations may legally file for bankruptcy like other organizations. There are two main kinds of bankruptcies a community can file for:

• Chapter 7. Bankruptcy under Chapter 7 is less common and requires the HOA to liquidate its assets to settle debts.
• Chapter 11. Bankruptcy under Chapter 11 allows the HOA to reorganize and manage daily proceedings. However, big decisions will need approval from the court. HOAs that file for bankruptcy under this chapter must devise a repayment plan and follow through under a court trustee’s supervision.

 

How to Avoid Defaulting on an HOA Loan

Homeowners associations should take several measures to avoid defaulting on a loan. Here are some things an HOA can do to ensure it can pay its debts.

 

1. Increase Dues

A lot of HOAs take out loans precisely so they wouldn’t have to increase monthly assessments. However, increasing the monthly dues is usually a good idea anyway so the community doesn’t default on the loan. Consider gradually increasing the dues over time. This way, homeowners won’t be shocked by a sudden jump in fees, allowing them to adjust their budgets to meet the loan repayments.

 

2. Cut Down on Expenses

One good strategy to adopt is to temporarily cut down on expenses to remain current on loan payments. Consider pausing non-essential activities such as capital improvement projects, renovations, and new constructions. In addition, the community may try to renegotiate some vendor contracts to obtain a discount. The board may also look for other vendors that offer the same service at a lower price to reduce monthly spending.

 

3. Consider Other Sources of Income

Homeowners associations primarily obtain income through member assessments. However, while it’s a good idea to increase monthly assessments, HOAs may also consider other sources of income. For example, the community might consider renting out certain amenities like the gym or clubhouse. Rental income can relieve the HOA and community members as it may compensate for a slight assessment increase.

 

4. Create a Financial Plan

Good financial planning is key to staying financially stable. Make sure to consider how the loan will be used seriously. Moreover, a plan must be devised to obtain more funds to repay the loan. The board may pick one or two of the strategies above or even combine all the strategies to reduce the odds of default effectively.

 

Responsible Financial Management

Homeowners will be significantly affected if their HOA is in debt. For this reason, it’s best to come up with a good financial plan before taking out a loan. Otherwise, homeowners will suffer as the HOA may fail to provide its promised services.

Condo Manager is an industry-leading management tool for planned communities and management companies. Let us help you with everything related to community management and financial planning. Call us now at (800) 626-1267 or contact us online to get a demo!

 

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One of the last things any homeowners association needs is a recession. But in what way can a recession affect the HOA? And what can HOA boards do about it?

 

How Does a Recession Affect the HOA?

A recession is a temporary economic decline marked by a fall in GDP for two consecutive quarters. While it does not always happen, it is still a real possibility. And according to historical data, recessions typically last an average of 10 to 17 months. For homeowners associations, that can translate to many months of financial hardship.

Homeowners associations are not invulnerable to economic dips. But how exactly does a recession affect the HOA?

 

An Increase in Delinquencies

First of all, recessions usually see an increase in unpaid fees for HOA communities. Homeowners fund homeowners associations through the payment of regular dues. But, during a recession, there is high unemployment and lower economic output.

Many homeowners could suffer pay cuts or even lose their jobs altogether, resulting in a diminished or no steady income. And HOA dues tend to drop from owners’ priority lists when they are too busy saving money for food, heat, and mortgage payments.

 

An Increase in Vendor Fees

During a recession, raw materials and labor costs typically go up, and inflation is also a contributing factor. Vendors end up charging more for their products and services when this happens. And homeowners associations are forced to either adjust or slash their budgets.

 

Budget Deficits More Likely

When you combine the first two effects of a recession, HOAs will more likely face budget deficits. Because not enough homeowners pay their dues, the association can’t reach its target funding. And rising vendor fees can throw everything off course, too.

A budget deficit is unfavorable because the HOA can’t pay for all its necessary expenses, such as cleaning, maintenance, and insurance. When these expenses fall behind, the community suffers. For instance, the neighborhood will deteriorate more easily without cleaning and maintenance. All of this will ultimately cause trouble for the HOA.

 

How to Recession-Proof Your HOA

Homeowners associations can suffer several pitfalls during a recession. As such, it is important to prepare for a recession. The most obvious solution is to increase dues while owners can still pay them. But, if the HOA cannot increase dues easily, boards should take the following steps.

 

1. Review the Finances

The first thing any association should do is review its finances. This will allow the board to understand the financial health of the community. Check the association’s bank accounts, reserve funds, and upcoming expenses. Evaluate which expenses or forthcoming projects are essential and which ones are not. Non-urgent costs might need to take a back seat while the economy — and the homeowners — recover.

 

2. Make Necessary Cuts

Once you have a picture of the association’s finances, you can decide which expenses to cut. Expenses that usually get the boot are those that are expendable or luxury costs, and social events are a good example.

It is also worth looking for cheaper alternatives or vendors for essential costs. If not, consider negotiating a lower price or cutting back on some of the services you get. Hold off on getting that new gym equipment or having a new pool installed.

 

3. Consider Outside Funding

If your HOA is having difficulty meeting its target budget with just homeowner dues, consider seeking outside funding, such as a bank loan. When taking out a loan, please make sure to find one with low interest. Many banks have programs that specifically cater to homeowners associations. A loan will help your association supplement its budget, protect the reserves, and pay for emergency repairs (if needed).

 

4. Offer Help

Aside from ensuring the financial health of the HOA, boards should also try to assist struggling homeowners. Due to job loss and a higher cost of living during a recession, many homeowners might need more funds to pay for everything, including HOA dues. Your HOA board might consider offering payment plans to ease their troubles.

Additionally, some organizations offer relief in times of difficulty. Make sure to research local organizations to see what resources are available in your community. Sometimes, the government also steps in to help, which happened during the COVID-19 pandemic when owners struggledwhat happened during the COVID-19 pandemic when owners were struggling to keep up with mortgage and HOA payments. Once you have all the information, spread the word. This way, homeowners know what options are available to them.

If the recession didn’t affect your community as much, consider extending a helping hand to other communities. You can organize a fundraiser or make donations, and this is an excellent way to give back and build camaraderie with other communities.

 

5. Seek Help

If your HOA board needs to be equipped to handle the effects of a recession, ask for help. Feel free to reach out to your HOA management company. Your HOA manager can help you devise a plan for the recession, cut unnecessary expenses, and even negotiate with vendors.

 

The Importance of Communication During a Recession

Recessions can be scary, not just for homeowners associations but for all residents. People are facing pay cuts, reduced work hours, and a higher cost of living. Many homeowners feel stressed during this time because they are still determining if they will still have a job the next day. And so an HOA that constantly knocks on their doors, asking for payment, can send them over the edge.

This is why communication matters. Make sure homeowners can reach the HOA board and the manager if they need help. Board members should also actively communicate with homeowners. Explain to them that the recession can affect the association, too, and that it will take everyone’s cooperation and understanding to keep the community afloat. Tell them of any expenses you had to cut back on, including any projects that have been delayed as a result.

Compassion is essential, but that doesn’t mean the association should completely do away with collections. Dues still play a vital role in the financial health of the community. Instead of eliminating rights, consider offering payment plans or early bird discounts.

 

Can a Recession Affect the HOA? Answered!

A recession can have long-lasting impacts on any homeowners association. Now that you know how to prepare for it, make sure to start your preparations early. Acting too late, when a recession is already in full force, may not yield desirable results.

Condo Manager offers advanced software solutions to HOAs and management companies. Call us today at (800) 626-1267 or contact us online for a free demo!

 

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An HOA audit is an instrument that can help you measure the financial health of your association. Unfortunately, not all associations take audits seriously — and therein lies the problem.

 

What Is the Purpose of an HOA Audit?

A homeowners association audit is a comprehensive inspection of an HOA’s financial accounts and reports conducted by a third-party professional. The goal of an audit is to objectively evaluate the association’s finances and assess its financial health. An audit is necessary because it provides assurance that an HOA’s financial statements and reports are complete and accurate.

When an HOA skips an audit, it runs the risk of financial mismanagement. Everything is connected to the audit — from budgeting and spending to accounting and fraud prevention. An audit can also identify minor issues before they worsen. Thus, it is important to include it in your HOA annual checklist.

 

HOA Audits vs Financial Review: What’s the Difference?

While they may sound like they offer the same things, a financial review and an audit are two different things. A financial review examines the financial records of an association and provides a report that the board can use to make short-term financial decisions.

In comparison, an audit is an extensive inspection of the association’s finances. It involves an in-depth analysis of the financial records, reports, and statements of the HOA, making sure to verify them for accuracy and completeness.

Instead of just examining documents at the surface level, a Certified Public Accountant (CPA) will contact creditors and debtors to confirm the association’s payables and receivables. The CPA will also compare the association’s financial reports with all of its records, including invoices, ledgers, and receipts.

Audits are comprehensive, so associations should prepare the following records and documents for the CPA to review:

• Financial reports and statements (including the balance sheet, the income statement, the general ledger, etc.)
• Operating budgets
• Invoices and bills
• Receipts
• Bank statements and records
• Reserves and reserve schedule
• Contracts
• Investments
• Minutes of board meetings
• Engineering studies
• Insurance policies
• 1099s

Due to the nature of audits, they are understandably more expensive than a financial review. However, compiling and organizing your documents ahead of the audit itself can minimize costs. Additionally, it is a good idea that board members make themselves available when an audit is taking place. This is so any questions or concerns that the CPA has can be addressed immediately.

 

HOA Audit Requirements

Do all homeowners associations require audits? How often should an HOA be audited? These are some of the most common questions people ask when it comes to HOA audits. The answer, though, is not so universal.

Some states have laws that require HOAs and condominiums to perform audits. Others only require a financial review. For instance, California Civil Code § 5305 stipulates that an association shall prepare a review of the financial statements according to the Generally Accepted Accounting Principles (GAAP) for any fiscal year where the HOA’s gross income is over $75,000. The law also states that a licensee of the California Board of Accountancy must conduct it.

Apart from state law, HOA boards should also refer to their governing documents. The bylaws or CC&Rs will likely contain the audit requirements that the HOA must follow. This includes what kind of examination is necessary (financial review or audit) and the frequency of the examination.

Even if no such requirement exists for your association, it is best to have an audit performed at least once every year. An HOA annual audit can ensure the health and accuracy of your finances.

 

Should You Get an HOA Financial Audit?

When the law or your governing documents don’t require an audit, it is easy to just dismiss it. But, there are plenty of other reasons to do an audit.

 

1. Keep Large Assets in Check

Whether you have a large HOA or a small one, an audit can help you keep your finances in order. But, given the cost of an audit, smaller associations may not be able to justify the expense every year. In that case, a small community with fewer assets may only need to perform an audit every few years, opting for a financial review annually instead.

On the other hand, larger communities typically have more assets to manage. More assets mean more room for accounting errors. Thus, for such associations, an annual audit is likely the wiser decision.

 

2. Promote Transparency

Whether it’s in a corporate setting or an HOA setting, transparency is absolutely essential. After all, homeowners have a right to know where their fees are going. Audits can help promote transparency in the association. It assures homeowners that the HOA is spending money wisely and that there are no discrepancies in its financial operations. Additionally, in many cases, homeowners can call for an audit to take place.

 

3. Facilitate a Smooth Transition

If an HOA is switching from one management company to another, an audit can help with the transition. New management can get a feel of the association’s current financial standing as well as how the previous company did things. The results of the audit can also inform the plans and decisions of the new company in charge.

 

How Much Does an HOA Audit Cost?

On average, audits can cost anywhere between $4,000 to $6,000. Given the complexity of a financial audit, though, such a price is understandable. Audits are time-consuming and labor-intensive, but their results are well worth the investment.

Alternatively, for associations that only need to conduct financial reviews, the cost expectation is lower. On average, a financial review can cost somewhere between $1,500 to $2,000.

Financial audits and reviews don’t come cheap, but they are often necessary. As such, associations should budget for them early in the year to make sure it has the means to meet the requirement.

 

Beneficial for All Parties Involved

Clearly, an HOA audit poses several benefits not only for the association itself but also for the members living in the community. With an audit, members are made aware of the association’s financial health. This not only gives them assurance but also ensures transparency, thereby strengthening the trust between the homeowners and the board. On the side of management, an audit will help board members make well-informed and smarter financial decisions.

To make sure you have a smooth audit process, you need to prepare all of your records and documents ahead of time. Keep them all in one place with the help of Condo Manager. Call us today at (800) 626-1267 or get in touch with us online for more information.

 

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Every member of a managed community should know how to read HOA financial statements. This knowledge will help owners understand how the association is doing financially and be able to determine whether the board is doing its job well.

 

HOA Finance 101: How to Read HOA Financial Statements

Homeowners associations operate largely like corporations. There is a Board of Directors that calls the shots and ensures that the organization is running smoothly. The HOA board is also responsible for preparing regular financial statements, though this job can also fall on the HOA manager.

Typically, financial statements come at the end of every month and at the end of the fiscal year. In many states, such as California, the law requires homeowners associations to make these statements available for members to review. Homebuyers can also have access to such reports, as assessing the financial health of the association will help them make a decision on whether or not to buy into the community.

 

What Are the Benefits of Knowing How to Interpret Financial Reports?

It is important for both board members and homeowners to learn how to read HOA financial statements. For one thing, it is part of the board’s job to do so. Knowing how to interpret financial statements will help the board prepare an accurate annual budget. It will also inform the board’s discussions when it comes to the association’s finances, allowing them to make sound financial decisions.

For homeowners, understanding HOA financial statements will let them stay on top of the association’s financial condition. Homeowners benefit from the community’s financial success, as it has a direct impact on property values. As such, it only makes sense to keep track of its finances. Homeowners also have a right to know where their money is going. After all, owners pay regular dues for the purpose of maintaining the community.

Beyond all else, knowing how to read financial statements will help both boards and owners in preventing fraud. If only one person understands these reports, then it would be easy for that person to cook the books and steal money from the HOA. Learning how to read financial statements will allow owners to spot any signs of fraudulent activity.

 

A Guide on How to Understand HOA Financial Statements

Unfortunately, not everyone in an HOA community knows what the numbers mean in financial reports. But, once one knows about the basics, it is actually relatively easy to learn how to read HOA financial statements.

 

Balance Sheet

The balance sheet shows a snapshot of the association’s financial condition. It presents the HOA’s assets, liabilities, and equity — all in one neat report. It is called a balance sheet because the association’s total assets should equal its total liabilities and equity.

Through the use of financial strength ratios (such as working capital and debt-to-equity), an owner can determine whether the HOA can meet its obligations. These ratios, along with several others, give owners an idea of the association’s financial stability. While the balance sheet is an integral part of any HOA’s financial package, it usually requires the accompaniment of other reports to fully understand the association’s financial health.

 

Income Statement

The income statement is a detailed view of the association’s income compared against its expenses. It essentially shows whether or not the HOA was able to meet its financial obligations with the funds it has accumulated over a set period of time. The income statement consists of the HOA’s revenues, expenses, and reserve contributions. Totaling all of these numbers will arrive at a net profit or loss for the association.

Though it is not an HOA’s main goal to earn a profit, a net loss would indicate that the community had more expenses than revenue streams in the past period. This means the board either did not practice smart spending or failed to prepare an accurate projected budget. Sometimes, it could point to an underlying financial issue such as fraud or embezzlement.

Owners should look for overly inflated expenses or redundancies to spot fraudulent activity. For instance, it would not make sense to spend five figures on office supplies. Members should remember that it is okay to question the board’s spending and that such a practice is healthy and helps keep the board in check.

 

Cash Flow Statement

The cash flow statement consists of three parts: operating activities, investing activities, and financing activities. Analyzing the cash flow statement will allow boards and owners to understand how the association is handling its money.

Under operating activities, owners will find the association’s cash sourced and spent on business-related items. This could mean dues from owners, fines, salaries, and other operating expenses. Under investing activities, owners will find items that are considered investments, such as assets or equipment. Any reserves invested should also be presented here. Finally, under financing activities, owners will find cash sourced from investors such as banks.

 

Accounts Receivable Report

The accounts receivable report tells boards and owners how much is owed to the association. It is a summary of all the money the association expects to receive. It could include dues from homeowners, rental income from a facility, etc. This could also come in the form of an aging report, which shows how long each account has remained unpaid.

The HOA should maintain a fairly reasonable AR report. It should not have too many receivables, especially overdue receivables, as that would mean the board is not putting a lot of time into collection efforts.

 

Accounts Payable Report

The accounts payable is similar to the accounts receivable report but in reverse. Instead of showing amounts owed to the HOA, this report shows the amounts the HOA owes. As with the AR report, it may also show how long each account has remained unpaid. Too many payables would indicate that the association is not paying its debts on time or that there is not enough money to settle the balances.

 

A Form of Protection

Boards and homeowners alike must learn how to read HOA financial statements. In doing so, they can interpret the reports accurately and make smarter financial decisions. It is also a way to protect the association from fraudulent acts. When it comes down to it, understanding financial statements should not be a job left only to one person.

Homeowners associations can significantly make financial statement preparation easier with the help of HOA software. Call Condo Manager today at (800) 626-1267 to learn more or contact us online for a free demo.

 

RELATED ARTICLES:

• HOA Accounts Payable Report: What Is This For?
• HOA Account Delinquency Report: Does Your HOA Need One?
• 4 HOA Financial Reporting Mistakes To Look Out For

Homeowners association fraud or embezzlement can happen anytime, anywhere, and anyone — even to the closest, tight-knit communities. If you want to safeguard the financial health of your community, consider these strategies to prevent HOA fraud.

 

Most Common Types of HOA Fraud to Look Out For

HOAs are run by a handful of people, known as the board of directors. They handle the day-to-day operations of the association, including the management of funds. If there are no checks and balances set in place, it can be very easy for a dishonest board member to commit fraud. However, HOA fraud isn’t exclusive to board members. Managers, employees, and volunteer homeowners can also commit fraud if the HOA has lax rules and standards.

What is HOA fraud? Fraud is a deliberate act of deception for the purpose of personal or financial gain. If you don’t want your community to become an unwitting victim, here are the most common types of HOA fraud that you need to look out for.

 

HOA Embezzlement

Homeowners association embezzlement is a form of theft. It involves a person taking property that was entrusted in his/her care by the association and using it for him/herself. HOA embezzlement comes in different forms. It can be a board member issuing checks made out to their name, collecting dues and payments but pocketing the funds, or altering financial documents.

 

HOA Mismanagement of Funds

Mismanagement or misappropriation of funds in a specific type of embezzlement. It involves a person taking HOA funds and using them for his or her personal benefit.

 

HOA Kickbacks

Kickbacks are payments or gifts that a vendor gives to a board member in exchange for hiring their company. It is also HOA fraud when a board member receives a portion of the contract money.

 

HOA Election Fraud

Election fraud can have many forms. The board can skip the annual elections or postpone it indefinitely to keep their positions. Individuals may also rig the election results to produce their desired outcome or forge proxy signatures to collect votes.

 

 

Best Ways to Prevent HOA Fraud

HOA fraud can occur due to a lack of oversight. If you want to prevent HOA fraud, it’s important to establish checks and balances. These will make board members, managers, and employees accountable for their actions, thereby reducing the potential for fraud or embezzlement.

 

1. All Checks Should Be Made Out to the HOA

Sometimes, for the sake of convenience, the board may issue checks to themselves or to certain individuals. However, this makes it easy for a dishonest member to commit fraud.

To prevent check fraud, ensure that all checks are made out to the HOA. You should also limit access to the checks to prevent unauthorized persons from issuing checks out to themselves.

 

2. Require Double Signatures for Checks

Another way to avoid check fraud is to require signatures from two members of the board. While this strategy may not be as efficient, especially when there are emergency situations, it helps prevent HOA fraud.

An option would be to set up this rule for transactions that exceed $500. The HOA can safeguard its bank accounts without hampering the essential day-to-day operations.

 

3. Do Not Let Management Sign Checks for Themselves

HOA management makes life easier for board members. Your manager handles HOA operations, including financial transactions that may occur throughout the day.

However, to discourage potential fraud from your management, do not let them issue checks for their own services. They can still issue checks for third parties. But if they perform maintenance work or other services, have a board member review the invoices and issue the checks.

 

4. Have Board Review Financial Documents

The HOA treasurer shouldn’t be left to do all the financial tasks. One way to safeguard the HOA is to have the board (or at least two members) independently review financial documents each month. This will make it harder to alter bank statements, inflate budgets, or duplicate reimbursements.

Regularly monitoring financial documents will also make it easier to spot anomalies or errors. Whether it’s an honest mistake or a sign of HOA fraud, the board can address the issue quickly.

 

5. Delegate Financial Responsibilities

Having just one person in charge of finances — whether it’s the treasurer or the manager — makes it very easy to commit fraud. As such, consider delegating the financial responsibilities to different members of the board.

You can have one person in charge of making the deposits while another is in charge of reconciling bank statements. This is a good example of introducing checks and balances in your HOA.

 

6. Require Board Approval for New Vendors

HOAs should be suspicious if a board member is pushing for a new, more expensive vendor even if the current one has been providing quality service. He or she may be receiving a kickback in exchange for the vendor contract.

Also, watch out for board members who recommend a company that is unqualified for the job. There may also be a kickback or the company may not even exist at all. Make sure that the board of directors is aware of vendor changes. You also need to properly vet new vendors to ensure that they are qualified professionals and that their prices are reasonable.

 

7. Make Sure HOA Is Insured for Fraud

To protect the financial status of your HOA, make sure that you are insured for fraud. Crime and fidelity insurance coverage will cover financial losses due to fraud or embezzlement.

You should also have directors and officers (D&O) insurance. This can protect board members from personal liability in case an employee or manager commits HOA fraud. Just because you have insurance, though, doesn’t mean that you should be complacent. In many cases, the payout can take a very long time and the HOA is left to deal with rising expenses.

 

8. Establish an HOA Election Committee

The board is responsible for scheduling and announcing the HOA elections. However, beyond that, the board should not be involved in the election process. Create an election committee that is comprised of homeowners who are guaranteed to be fair and impartial. They will be the ones to handle the election process to prevent HOA corruption or fraud.

 

Examples of HOA Fraud

Most HOA board members, managers, and employees are hard-working and good-intentioned people. However, this doesn’t mean that associations should be lax or complacent. We are all human and under dire or unfavorable circumstances, it’s possible that an individual might feel compelled to commit HOA fraud. To overstate the importance of vigilance, here are some examples of HOA embezzlement cases:

 

Case #1

A woman, who served as the secretary of her Florida HOA, was charged with grand theft after taking over $300,000 from HOA funds. The woman withdrew $121,390 from the HOA’s bank accounts and had written checks to herself and her husband for $97,045. She admitted that she used the stolen funds to pay for her mortgage and other bills.

 

Case #2

A man was indicted for money laundering and embezzlement after stealing more than $450,000 from a Virginia HOA over the course of four years. The man served as the association’s finance manager. The HOA discovered his theft through an HOA audit, which uncovered evidence of his wrongdoings.

 

Case #3

In New Jersey, a property manager was sentenced to six years in prison after embezzling over $400,000 from the condominium complex that he managed. The judge also ordered the woman to make full restitution to the HOA. She was caught after HOA residents notified residents of their delinquent dues despite having paid the fees.

 

Always Be On the Lookout for Signs of HOA Embezzlement or Fraud

Most HOAs don’t know that there has been fraud or embezzlement until it’s too late. By then, your association may have already lost a large sum of money. It could take years to recover these stolen funds — if they can be recovered at all.

This puts the HOA in a precarious financial situation. Add to that, bad press can also turn off new homebuyers and cause property values to drop.

To protect the financial well-being of your community, consider implementing these strategies we recommended. These additional steps may take more time and effort but oversight and vigilance are crucial for preventing HOA fraud in your community.

HOA fraud can go undetected if your finances are a mess. If you need help with financial management, feel free to contact the Condo Manager team today! Call us at (800) 626-1267, email us at sales@condomanagerusa.com, or contact us online to learn more about our HOA software solutions.

 

RELATED ARTICLES:

• 4 HOA Financial Reporting Mistakes To Look Out For
• 7 Reasons Why You Should Use A Property Management Accounting Software
• HOA Management Fee: Are They Charging You Right?