A well-planned budget is crucial for any homeowners association (HOA). That said, most of the money in an HOA comes from homeowners paying their dues. So, it’s important that the money gets allocated to projects and resources that will help the community. However, a budget that’s not properly prepared can cost homeowners even more money. Today, we’re reviewing why a budget is so important, how to create one, and common HOA budgeting mistakes to avoid.
Contents of This Article:
- Why Is an HOA Budget So Important?
- How to Create an HOA Budget
- Common HOA Budgeting Mistakes
- Tips on How to Avoid HOA Budgeting Mistakes
- Let BMG Help You Plan Your Budget
Why Is an HOA Budget So Important?
Every year, your HOA needs to develop a budget to ensure good financial health and stability within the community. One main reason is that homeowners pay to be there and expect to live in a well-maintained community with desirable amenities. As such, providing a clear plan for managing income and expenses helps homeowners understand where their money is going.
A well-structured budget covers operational costs, funds necessary expenses, and maintains a reserve fund for unexpected expenses. Additionally, it allows the HOA board of directors to prioritize community improvements and avoid unforeseen costs. Ultimately, an accurate budget helps maintain property values and creates a well-maintained community with happy homeowners. Whether it’s done by the HOA board or a Philadelphia HOA management company, it all depends. However, creating a budget is one of the most critical tasks when it comes to HOA management.
How to Create an HOA Budget
Creating an HOA budget involves several important steps. First, you’ll want to assess the income your HOA receives each year. Typically, this consists mainly of assessment fees, covering operational costs, funding community enhancements, and contributing to a reserve fund. Other sources of income may include rent payments or fines for HOA violations.
Next, determine how your HOA spends the income. For instance, evaluate how much goes to operational costs, community enhancements, reserve funds, etc. Once you know where the money is going, you can create a plan that includes goals and objectives to help plan the budget for the upcoming year. Looking at past budgets is a great resource for allocating funds for the next year.
Keep priorities in mind while creating an HOA budget. For instance, repairs and replacements are crucial to an HOA community and take up a large part of the budget. However, if you go over your budget, it can impact homeowners in the community. So, set priorities and schedule repairs or replacements based on urgency.
Common HOA Budgeting Mistakes
While creating an annual HOA budget, it’s important to account for everything that may impact income or expenses throughout the year. For instance, the price of HOA dues, maintenance expenses, and how inflation may impact these costs.
Let’s review some common HOA budgeting mistakes, and then we’ll discuss how to avoid them.
- Underestimating Expenses
- Not Reviewing Past Budgets
- Neglecting the Reserve Fund
- Failing to Account for Inflation
- Lack of Community Input
Underestimating Expenses
One of the most common mistakes in HOA budgeting is underestimating or overlooking essential expenses. HOA expenses include everyday operational costs like landscaping, utilities, management fees, and insurance. However, they also include less frequent costs like unexpected repairs or legal fees. That said, failing to properly account for all of these expenses can leave the HOA short of funds, forcing the board to make quick adjustments. These adjustments may include cutting important services or imposing extra fees on homeowners to cover unexpected costs.
Not Reviewing Past Budgets
Every good budget is based on the previous year’s expenses. Not reviewing previous budgets can cause HOAs to repeat mistakes, underestimate costs, or overlook spending trends. By reviewing previous budgets, boards can identify mistakes from previous years, such as differences between projected and actual expenses or areas where spending consistently exceeds expectations. For instance, if past budgets reveal that maintenance costs were consistently higher than projected, the HOA can better plan for these expenses in the future.
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Neglecting the Reserve Fund
Every HOA needs a reserve fund. After all, it’s crucial for covering major repairs and unexpected expenses, like roof replacements, structural repairs, or emergency maintenance. One of the biggest budgeting mistakes an HOA can make is underfunding or neglecting the reserve fund. Without adequate reserves, the HOA may need to charge special assessments on homeowners to cover large expenses. As you can imagine, this can cause frustration or financial strain for residents. So, to prevent this, HOAs must ensure they’re setting aside enough funds each year to handle potential large-scale repairs or replacements without any financial disruptions.
Failing to Account for Inflation
Inflation generally increases the costs of goods and services over time. However, many HOAs forget to account for these rising prices when creating their budgets. This oversight can result in underfunding crucial expenses like utilities, maintenance, or vendor fees. For instance, landscaping costs, materials, and services may increase yearly. But, if the HOA doesn’t adjust its budget to reflect these price changes, it could fall short when it’s time to pay for these services. So, to avoid this, HOAs should periodically review their contracts, research industry trends, and incorporate expected inflation into their financial planning.
Lack of Community Input
Another common mistake is failing to seek input from homeowners when creating the budget. After all, homeowners are the ones paying HOA dues and often have valuable insights or preferences regarding where the HOA allocated funds. If the board creates a budget without considering the community’s priorities or concerns, it can lead to frustrations or pushback from residents. To avoid this, HOAs can involve homeowners by conducting surveys, holding community meetings, or offering opportunities for feedback.
Tips on How to Avoid HOA Budgeting Mistakes
To avoid HOA budgeting mistakes, it’s important to develop a thoughtful financial plan. This includes estimating income and expenses, putting aside a reserve fund, conducting financial reviews, and more. Here are some tips to consider when putting together the annual budget.
- Estimate Income and Expenses- Start by assessing operational costs, including maintenance, utilities, insurance, and management fees. Don’t forget to account for both recurring expenses and one-time projects. Additionally, avoid overestimating revenue from assessments, fees, or other sources. Instead, try to base income projections on historical trends.
- Create a Reserve Fund- Establishing a decent reserve fund is crucial. So, you should set aside enough money for major repairs and unforeseen instances. You can also look at previous years to determine how much you may need to cover expenses like roofing or common area maintenance.
- Prioritize Projects– Instead of fixing everything at once, focus on necessary repairs and essential maintenance first. It’s important to prioritize maintenance and projects based or urgency to ensure the community funds are used efficiently. For instance, if you have a common area building in poor structural health, you may want to fix that before installing a new pool.
- Seek Professional Help– There’s nothing quite like help from a professional accountant. Your HOA can benefit from hiring a financial consultant or accountant to help guide the budgeting process. These professionals can help estimate costs and manage financial risks more accurately.
Let BMG Help You Plan Your Budget
If you need help creating and managing your HOA budget, you may want to consider hiring professional management. Companies like Bay Property Management Group offer comprehensive management services, assisting with everything from the annual budget to conducting meetings, performing maintenance, and more. So, if you need help managing your Philadelphia HOA community, contact BMG today!
