The HOA Budget
If you are a member of an HOA board and/or are a property manager for a HOA, you have most likely participated in the usually less than delightful, even thankless, annual budget session(s). Here are a few thoughts, not exhaustive of course, that I have found useful during this important process.
First, some general guidelines:
- Take It Seriously. If you are a HOA board member, then you are volunteering your time. Thank you, but remember, what happens in this budget meeting influences the lives of all your HOA neighbors. You have been entrusted with an important responsibility. Be prepared. Be informed. Be responsible.
- Keep It Legal. The HOA Bylaws specify your financial responsibilities. Take the time to be clear on what you are legally required to do and what you cannot legally do. It is a good practice to review the Bylaws of your association before engaging in the annual budgeting process.
- Fund It Wisely. Keep in mind both what your Reserve Study has set as goals and what can reasonably be expected from your association members. If you attempt to accomplish too much or set the bar too low, the consequences may cause you no end to grief well into the new year, and possibly beyond that.
The Reserve Study
This is an important tool that most HOAs should have already commissioned and have since kept updated. It will prove to be a useful guide in your budget deliberations. It will let you know what types of things must be funded in order to meet the fiduciary responsibilities of the board. If you don’t already set aside the appropriate reserve funds, unavoidable repair/replacement expenses will sooner or later require the board to request a special assessment(s) from each member, which may run into the hundreds, if not thousands of dollars. Don’t neglect to plan for the long term maintenance needs of your community. (See our article on Reserve Study)
That being said, budgeting is not merely a rational venture.
The Psychology of Budgeting
Many people never take the time to create a personal budget. They never set aside funds for the unexpected. They repress the thought of ever having to replace a roof or a hot water heater because the amount of money required is too painful to consider. Far too many people are, unnecessarily, just one predictable expense from financial disaster. If they had just set aside a few dollars from each paycheck, based on the known lifespan of the items that will eventually need to be replaced, they would be spared much agony later.
In other words, if folks are financially ‘winging it’ in their personal finances, can you imagine how they will respond to funds being set aside in the HOA budget? This is especially true if those ‘extra’ funds must come from a special assessment or from an unexpected and sizable increase in their monthly dues?
For instance, when association members see that the HOA has $300,000 in a reserve fund, yet the board has again requested another 10 percent increase in the monthly dues, some owners will go ballistic. If, on top of the monthly increase, a special assessment is levied because the legally allowable increase in the dues (according to the Bylaws) would be insufficient to meet the projected budget, they may feel justified to angrily cry foul and move to fire all the board members!
After you have worked together to create what you believe is a responsible budget for the new year and have established how much more income will be needed to fund the budget, it is time to consider how best to present it. Sit back and imagine how some association members will respond. Remember, no matter what you do, some will react emotionally, not fully understanding what it takes to maintain the property. Brain storm the various revenue options.
- Would it be irresponsible to not raise the monthly dues in order to meet justifiably real needs?
- If there is an expensive maintenance project that can’t be delayed for another year, are there some other items in the budget that could reasonably be put off?
- Do you know your income and expense history well enough to answer questions from the members as to why a particular line item is there and why you are budgeting more for it this year?
- Do you know the numbers well enough to make changes on the spot at the annual board meeting?
- If you present a ‘best scenario’ budget and it receives a ‘no’ vote, do you have a Plan B ready to go?
If the members discover glaring errors in your budget they will naturally develop questions about the competence of the board members and the property management company. On the other hand, if they feel powerless to make even minor, acceptable changes they will begin to disengage and cease attending the board meetings, leaving you without a quorum.
All the above underscores the need for the following:
Educate, Educate, Educate
Most folks have never lived in a HOA prior to their current experience. That usually means that they don’t know what they don’t know. They see things getting done around them, so they don’t worry and don’t take the time to ask - who pays for all these wonderful perks? Who decides what needs to be done or not done? How much does it cost to maintain all this?
It is necessary to take the time to educate association members on why each item is in the budget for the amount recommended and the consequences for not dealing with the item now, rather than later. Members need to be informed about the purpose for a Reserve Study, why the board hires an eternal auditing agency, what the Bylaws require from board members, etc. These are usually not things learned in high school or in college.
Sadly, some board members may believe that it is better not to keep association members informed, wrongly assuming ignorance is bliss. They fear questions they might not be able to adequately answer. They fear questions that may be asked angrily. They fear having their competence questioned. They especially fear dealing with members who can never be satisfied. They hate to deal with those who will resist any increases to monthly dues - no matter how justifiable. Often, the very people who demand that the board fix this or that item around their own homes, month after month, are the same ones who vote against any fee increases. On the other hand, many of these same folks will hold the board accountable for not having maintained everything as the Bylaws require.
It is often best, in our American culture, to be open and honest all through the year. Use newsletters, social media, and meetings to keep folks well informed and educated about life in a HOA. If done throughout the year, by the time of the annual board meeting - when the budget is presented - most will be on board, having a good understanding as to why things are the way they are. (See our article on The Use of Social Media)
Keep in Mind Property Value
Some HOA boards do not fulfill their obligations in accordance with their HOA Bylaws simply because they don’t want association members to dislike them. Thus, they irresponsibly maintain monthly dues at the same rate, year after year, regardless of the obvious need for an increase. They permit the community to fall into disrepair simply to be today's hero of cheap living. Though everyone knows what needs to be done, no one dares to step up to the plate to make the unpopular, yet right financial decisions. Postponing the right decision for today, simply means facing more and unnecessary grief tomorrow. As the property increasingly falls into disrepair, property values begin to plummet. Those who were happy to have low monthly dues yesterday, quickly become extremely unhappy that their property value has decreased today. The result may be even more painful, such as not being able to sell a house in an HOA that has been poorly maintained. Or, finding it nearly impossible to rent out your property, except at a loss, because the whole facility looks uninviting and even shabby.
Eventually, there arrives a point when repair work can no longer be delayed. Unfortunately, at this point, what may have been a relatively inexpensive and quick maintenance job, now requires expensive reconstruction or possibly total replacement.
As a home owner within the HOA as well as a HOA board member, you should want your HOA board to do its job to keep the value of your home as high as possible. To accomplish that, you need to be willing to fund regular maintenance. You need to insist that the board competently addresses all the HOA issues, as required in the Bylaws.
Preventive Maintenance Trumps Replacement Costs
A responsible property management company will, with their appropriate vendors, frequently walk through the whole property and carefully inspect it. They will want to catch problems early, before they become major repair items that will cost the association members big bucks.
If you are a property manager, make sure that you are doing regular - even monthly - inspections. Take your time to look carefully at roofs, drainage, cracks in foundations, wear and tear, etc.
If you are a HOA board member, try to accompany your property manager on as many of these walk-throughs as possible so that you are a well-informed member of the board. This will be helpful information when sitting down to create a responsible budget for the new year.