Building the Right Budget for Your HOA
Purposeful Planning for Your HOA’s Financial Future
Another year is coming to a close, which means that for most HOAs, budget season is already in full swing. This can be a stressful time in an HOA, but with the right partners and guidance, communities can be in a much stronger position. In this post, we will share some best practices to consider during the budget process.
Start with Reserves
Funding reserves is very important for the long-term health of an HOA, as common property ages and requires maintenance, repairs, and ultimately replacement. Obtaining a reserve study and keeping it frequently updated will assist in determining the level of funding, or reserve transfers, recommended for your community. A reserve specialist takes into account the estimated replacement cost and the remaining useful life of common property to recommend proper funding to be prepared.
Budget for Non-Negotiable Increases
Items such as utilities and insurance typically increase year over year, and to build a proper budget, it is important to lay out the correct baseline for those expenses that will likely increase. While utilities tend to increase on average between 2-7%, some utility providers will share increase estimates which will help set your budget up for success. Insurance, on the other hand, has been increasing astronomically in the last few years. The best-case scenario in budgeting for insurance is to obtain quotes for renewal during the budgeting season. However, many policies renew mid-year, which means when budgeting you may need to estimate the increase. Although your broker or agent won’t have a crystal ball, they can provide guidance based on their knowledge of market conditions. As a rule, always budget for insurance and utility increases.
Bid Out Contracts
The next step to build a strong budget while maintaining control of costs is to review your existing month-to-month or annual service contracts. Services like landscaping, preventative maintenance, pool service, housekeeping, and even management should be reviewed annually. Even vendors who are performing well should be reminded that there is always competition, which encourages them to keep giving your community the best price and consistent service. Understand, however, that as costs rise across the board, your service providers do have to pay higher wages, higher fuel prices, and higher material costs. At a minimum, ask your vendors for their updated contracts and rates, and bid out contracts when possible.
Estimate the Variables
Categories such as office expenses, general repair and maintenance, groundskeeping, and snow removal aren’t as cut and dry as a service contract or a known utility or insurance increase. Some years may require more or less funds for a given item, based on the association’s specific operations. To budget for these expenses, it’s important to take into account multiple factors including a thorough analysis of prior year (or years) and current year-to-date actual expenditures. Additionally, any known or expected difference in operations should be accounted for, such as the administration of a special meeting or an upcoming major repair or maintenance project.
Generally, these categories also increase slightly year over year due to both the aging property which requires more maintenance, as well as rising vendor costs. Knowing what the community has spent historically while factoring any inflation or rise in CPI will help get these numbers as close to reality as possible.
Strategically Plan
Any capital improvement or repair projects to be partially or fully funded during the next fiscal year should be budgeted for within the operating budget, if possible, unless the project is scheduled to be paid from reserves. Projects can put a lot of stress on board members and homeowners both physically and financially. It is important to know when projects need to happen, and how to fund them. Strategically planning with professionals is a very important step, as they can guide the association in phasing strategies, funding opportunities, and may also provide ballpark estimates based on current and trending market rates. It’s not often that an exact estimate can be provided for a given project so far in advance especially if the scope has not been finalized, but engineering, construction, and management professionals can provide insight for what kind of budget a project should have well before kick-off.
Value Engineering
Finally, while not required, it can be very beneficial to perform a detailed review of the association’s operations and find cost savings with out-of-the-box strategies. For example, service contracts can be bundled together—many landscapers will provide additional services of groundskeeping or pet-waste management, which may save the association money if currently paying a specialist. Or, there may be new systems or features that will save the association money overtime. Xeriscaping to save water, installing leak detection systems, re-designing an irrigation system, or upgrading an access control system can all provide a great return on investment. Having these conversations with your manager is an important step to building a strong budget, even if not for the next fiscal year. The best way to build a budget in 3, 5, or 10 years, is to start planning today.
Be a Volunteer and a Community Member
Remember that every board member is a volunteer. If a community is paying for management services, then rely on the manager and other professionals to assist in preparing the budget and to provide professional guidance. It’s not pleasant to raise HOA assessments, especially in the current economic climate, but preparing a solid budget that realistically considers the next year’s estimated operating and administrative expenses is the right thing to do for any community, as next year’s costs will be what they are regardless of what a budget projects. Remember also that every board member is a homeowner in a community. Involving the community during this process, whether through establishing committees, conducting surveys, or simply just providing clear and transparent communication will go a long way to make the budget process easier on everyone involved.
If you are a Board Member with questions about your current or upcoming budget, reach out to us at RowCal today!