As most homeowners association (HOA) members know, it costs money to operate the HOA! Dues are regularly collected from the homeowners in the form of regular assessments. These are intended to cover the operating budget. Which takes into account how much money is needed for running the association. Helping the Board plan its overall budget for the year.
No one wants a special assessment, which requires homeowners to pay additional fees beyond their usual dues. But if the expenses aren’t covered, your Board might have to resort to one. Understanding the expenses of your community, and properly accounting for them is essential. It reduces the chance that your homeowners are faced with the unexpected cost of a special assessment.
Operating budget expenses
Some states, such as California, require annual operating budgets from every HOA. It doesn’t matter how large or small, according to Andy Sirkin. This allows a good Board to incorporate findings from the previous year. Maybe the costs of repainting have gone up, for example. The Board can modify the upcoming budget to take into account these practical realities.
If the homeowner’s association has a reserve funding study on hand, they can incorporate those findings. For example, suppose the reserve study foresees replacing the pool heater in the coming year. In that case, the operating budget will take that expense into account.
Reserve funds may be used temporarily for operating expenses. However, the money is intended to cover replacement for significant items. If you keep taking funds from your reserves, you know you have an issue. Either your budget isn’t reasonably accurate, and you need to adjust it or increase homeowner dues (or both!)
Most associations prefer to avoid asking their homeowners to contribute more than their dues. As you can imagine, paying more money to the HOA doesn’t please the homeowners! But suppose the budget isn’t accurate, or the reserves aren’t enough to meet those costs. In that case, the association can request a special assessment.
Two expenses can change significantly from year to year: insurance and utilities. You can look into some cost savings for utilities to reduce the amount you need to pay going forward.
For example, in California, you might think about some solar panels to reduce electricity use. In areas subject to drought, a great option is xeriscaping: landscaping that needs little to no irrigation. It conserves water, which reduces your water bill.
The Board might need to shop around for insurance every year to see if they can find cheaper alternatives. Make sure when you’re comparing bids that you’re comparing apples to apples. Not all insurance companies offer the same amount of coverage for every potential issue.
Who determines the operating budget
In most cases, the HOA’s Covenants, Conditions, and Restrictions (CC&Rs) document who can approve the budget. In most HOAs, the Board can decide.
However, non-emergency special assessments or increases to the operating budget of a certain percentage often need to go to the homeowners for a vote. Raising the operating budget usually involves raising homeowner dues. Hint: none of your homeowners are going to be very happy with significant cost increases!
Keeping an eye on your operating budget and updating as necessary reduces the need for these increases. They may be unavoidable. However, the best solution is to stay in communication with your homeowners. That way, they’ll understand the need for an assessment when it comes.
As Echo notes, using monthly financial statements to help put together the operating budget can save you time later. You’ll want to make sure you categorize unbudgeted items. Incorporating them gives you a better idea as to how much that category will cost going forward.
How to create the operating budget
Clark Simson Miller explains that it’s better to start from the expenses first. Then determine what income you need. On the one hand, no one wants to be asking the homeowners for higher fees. On the other hand, you don’t want to prepare a budget that isn’t realistic and will cause a shortfall later in the year. If you can show your homeowners a realistic budget, it can be easier to get your funding sources.
There’s a quick and easy way to figure out what the fees are that the homeowners should pay. Add up the total operating expenses and the annual reserve contribution. Then divide by the number of homeowners, and voila! Your HOA fees.
Are they similar to last year? If they’re way off, you need to go back over your expenses and see if you can pinpoint why they’re so different. Then, decide how to address it with your homeowners.
The operating budget covers your expenses for the year. It includes any costs that have been determined by your reservation specialist for that year. Once you’ve determined your expenses, you can see how much you should charge each homeowner in regular assessments.
The Board typically makes these decisions, unless there will be a significant increase in an assessment. Be as thorough and meticulous as you can, putting together the financial statements. You’ll find the operating budget process much more comfortable!