HOA budget planning is an integral part of running a homeowners association. Whether you are new to the HOA board or simply a concerned member of the community, it is essential to familiarize yourself with the planning process.
Why Is an HOA Budget Necessary?
What is an HOA budget anyway? And why is it so important? Simply put, an HOA budget is a projection of expenses required to keep a homeowners association in operation. Without it, an association cannot calculate HOA dues and quickly fall into ruin.
Additionally, a budget can help the board make smarter decisions. For instance, if there is a project coming up, the board can turn to the budget to see how much it can allocate to the project. Having a budget in place also helps maintain transparency within the association. Because the board is required to present the budget to members, it acts as a way to hold board members accountable for their spending.
Annual HOA Budget Guidelines to Follow
Before the start of every fiscal year, the HOA board sits down to discuss and create the annual budget. Here are the considerations you must keep in mind during your HOA budget meeting:
1. Analyze Past Budgets and Financial Statements
A good way to make a plan for the future is to look to the past. Your board should dig up the association’s past financial statements to gain a better understanding of the HOA’s needs as well as your current standing. Using past budgets and financial reports as a guide can help you start on the right foot.
You don’t need to go all the way back and review a decade’s worth of financial statements. The past three years’ budget and financial reports should work just fine. Check each line item and keep an eye out for any trends. Perhaps your association consistently spent more on landscaping than it budgeted for. In that case, you can either increase the budget for landscaping this year or find ways to cut back on this expense.
2. Specify Expenses by Item
Your HOA budget is a blueprint of your projected financial expenses, so it only makes sense to be as specific as possible. Don’t just say you need $1,000 for maintenance. There are so many things that could possibly fall under maintenance expenses, such as plumbing maintenance, electrical maintenance, and the like. Break down each item as much as possible so that you know where money has to go.
3. Plan for Possible Increases
One of the HOA budget best practices you can adopt is to plan for expenses that constantly fluctuate. This typically relates to insurance and utilities. Although you can get a good idea of how much you can expect to spend on these items, they can increase unexpectedly and make you suffer a deficit.
A number of factors can influence utility charges. For instance, a drought can drive up the cost of water. When it comes to insurance, premiums and rates often shift every year, and you may very well end up paying more than you expected. To plan for this, look at historical data and calculate how much insurance rates have increased from year to year. Then, apply the same increase to arrive at your budgeted insurance cost.
4. Allow for Contingencies
Although proper insurance coverage is paramount to any association, not all expenses can be covered by your policy. HOA boards that encounter unanticipated costs usually either levy a special assessment (which homeowners dislike) or dip into the reserve fund.
Taking from the reserves might result in having to increase dues for the next year, though, since you need to make up for what you spent. To avoid these unpleasant scenarios, it is best to always budget for contingencies.
5. Evaluate Your Reserves
Homeowners associations use money from the operating fund to pay for day-to-day expenses such as maintenance costs, wages, and event management fees. HOAs keep a separate fund, known as a reserve fund, for major repairs and replacements that are usually set aside for the long-term. Common examples include roof replacements, retiling, equipment installations, and the like.
To continuously have money in the reserves, your HOA board must also include it in the budget. The amount varies from association to association. Generally, though, about 25 to 40 percent of HOA dues go into the reserve fund.
It is good practice to conduct a reserve study every few years. This way, you can stay on top of all your major assets and keep your reserves well-funded. Some states have specific requirements concerning reserve studies. For instance, in Virginia, the law mandates that associations must perform a reserve study at least once every five years.
To learn whether your state has reserve study requirements, check here.
What Does the Law Say?
As with reserve studies, there are some laws on HOA budgets, though they can change depending on where you’re located. In California, for instance, Civil Code Section 5300 dictates that associations must distribute an annual budget report to all members 30 to 90 days prior to the end of the fiscal year. The same section even breaks down what the annual budget report must include at a minimum, including a pro forma operating budget and a summary of the HOA’s reserves.
There are also some state laws on dues increases, which your budget will directly affect. If your budget increases significantly from the previous year, then so will the amount you charge in dues. California Civil Code Section 5605, though, might restrict your budget and dues increase. The section states that an HOA board must obtain approval from members if it plans to raise dues by more than 20 percent of the previous fiscal year’s dues.
Additional Tips for HOA Budget Creation
These additional tips, while not compulsory, can help you draft a better HOA budget:
- Put Together a Committee. Sometimes, board members need extra hands when putting together a budget. Consider assembling a budget committee to help you analyze past reports and make projections.
- Schedule a Meeting for Budget Planning. It is imperative to approach budget planning with a clear head, so it is wise to dedicate an entire meeting to the task.
- Call Vendors for Estimates. Even the cost of vendor services can fluctuate. As preparation, contact your vendors to verify whether they will impose price increases. You might also want to ask for special promos or discounts, especially if you have a long-standing relationship with the vendor.
Homeowners Association Budget Sample
Coming up with a budget from scratch can be difficult without a proper example of an HOA annual budget. To help you out, use the one below as your HOA or condo association budget template:
Digitize Your Budget
The HOA budget functions as a roadmap of sorts for your association’s expenses for the coming year. It helps determine how much homeowners should pay in dues and keeps the HOA board on track financially.
Having trouble preparing your annual budget? Condo Manager can help. Our state-of-the-art HOA management software makes budget planning easy. Just input the amounts and let our program do the calculations. Contact us today at (800) 626-1267 to learn more or fill out our online form to schedule a free demo.
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