Creating a budget is one of the most important jobs of an HOA board. Having enough funds to cover what the community needs will keep residents happy and supportive. Depending on your community’s needs, there could be many factors to consider. But luckily HOA budgets have been around for many years, so there are helpful guidelines created from other organization’s trial and error. We’ll discuss some of the best ones.
An HOA budget is broken into two main categories: operating expenses and reserve funds. Everything that goes into running the community is under the operating expenses category. The reserve fund is exactly what it sounds like – money put aside for surprise expenses.
How To Start Budget Planning
Budget planning should start about five months before the fiscal year. Many people’s instinct could be to create an HOA budget the same way they create a personal budget—to start with what money is coming in and they figure out what they can afford. HOA boards have to do the opposite. They need to first calculate the community’s needs for the upcoming year, and then plan the revenue (almost entirely made up of fees) to cover those costs. It’s important to avoid any potential shortfalls for the next year.
A good place to start is to thoroughly go through the previous three year’s budgets. Look for trends in spending, and any actual costs that were different from what was expected. Don’t forget to include inflation when comparing next year’s costs to this year’s. One easy tool that can help figure out inflation is the Bureau of Labor Statistics [BLS] inflation calculator, which you can connect to by clicking here: Bureau of Labor Statistics Inflation Calculator.
Now you have a ballpark of your needed spending for the next year. A few more details need to be dealt with before your budget is complete.
Money for Upkeep
The next step is to see if any new community expenses are likely to come up that were not in last year’s budget. New elements of upkeep that were not needed last year will probably have to be taken care of over the next year.
Some examples of these budget items are obvious repairs, painting, new landscaping, or other upgrades. Doing a walkthrough of the neighborhood, including recreational areas, can help you identify the most obvious ones. Any regular annual maintenance costs should already be in your estimates based on your review of the previous three year’s budgets.
Spending Needs That Can Change
Despite all of your planning, there are some expenses that are not in your control and can change. The categories are likely in the previous years’ budgets, but the costs could change unexpectedly. These categories are almost always utilities and insurance. Your review of the last three years’ budgets might have given you an idea which changed in the past, which helps but aren’t guaranteed.
One of the most likely expenses to have unpredictable change are utilities, such as water, electricity, garbage, sewer, and/or natural gas. You have probably experienced these changes yourself.
Another cost which HOAs have seen increase more than expected is insurance. Outside factors can raise rates, which has happened over the last few years. HOAs have been impacted by these changing rates. In fact, insurance rates have gone up 30-60% for HOAs, so make sure you take this into account for the cost of your insurance. Add some extra money to your utilities and insurance categories in your budget.
You don’t want to forget to create a reserve fund. It is very important for this fund to be set up, and ideally, maintained year to year. This money is used for new unforeseen expenses, which are likely to come up. An example is repairs from a hurricane, earthquake, or other natural disasters. You can use your reserve study as a guide on how large your reserve fund needs to be. But continue to add money to the fund even if you met the estimate in the reserve study.
Now Figuring Out the HOA Fees
After you have determined the costs your HOA will face in the coming year, you will need to figure out the monthly fee for each resident. The equation used by most HOAs is to
- Add up total expenses;
- Add the annual reserve contribution to that number, and;
- Divide by the percentage of ownership.
Is the fee close to what the fee was last year? Then you are in good shape. If it has changed a lot, you’ll have to re-evaluate your expenses and/or fees. Also, remember as tempting as it is to want to announce reduced fees, it isn’t worth it if the board winds up not being able to pay for things the neighborhood needs.
Cutting the Fat
There are ways to potentially cut down on expenses for the coming year. First, work on preventive maintenance which is usually cheaper than repair and can save you headaches.
Second, shop around when looking for contractors for repairs or maintenance, such as lawn care, landscaping, snow removal, etc. Finding a less-expensive but qualified contractor could save some money.
Third, consider ways to reduce things like utility cost. Is solar an option for your public areas with electricity needs? Is there a way to cut back on water used on lawn care? Looking at saving money with efficiency could be a big help for your bottom line.