Budget season is here for HOAs, and it’s essential for board members to take a careful and strategic approach when planning next year’s finances. A well-prepared budget ensures that resources are allocated effectively, operations run smoothly, and both routine and unexpected expenses are covered.
However, many HOA boards make some common mistakes during the budgeting process. Here’s what to avoid to ensure your budget is comprehensive and sets your community up for success.
1. Underestimating Costs
One of the biggest pitfalls for HOA boards is underestimating costs, especially when it comes to maintenance, repairs, and essential services like landscaping or pool maintenance. If the budget doesn’t adequately cover all potential expenses, boards may be forced to rely on special assessments or cut back on services mid-year—both of which can frustrate homeowners.
Review past financial records and consult with service providers to obtain accurate estimates for upcoming services and repairs. Always aim to budget conservatively. Overestimating a little is far better than finding yourself short of funds halfway through the year.
2. Ignoring Reserve Funds
A reserve fund is the safety net for your community, protecting against major future expenses like roof replacements, pool renovations, or road repairs. Unfortunately, many HOAs either fail to contribute enough to their reserve fund or overlook the importance of conducting regular reserve studies.
A reserve study is a critical planning tool that helps HOA boards assess the health of their reserve fund and estimate the contributions needed to cover long-term maintenance and repairs. The study includes both a physical inspection of the community’s assets (such as roofs, pools, and roadways) and a financial analysis that projects future costs. The results guide the board in determining the appropriate contribution levels to ensure the community is financially prepared for upcoming repairs.
If your community hasn't done a reserve study recently, it's time to schedule one. Reserve studies should be conducted every few years and updated regularly. They provide the board with a clear roadmap for long-term planning, ensuring that major repairs can be handled without special assessments or borrowing funds.
3. Lack of Member Involvement
The budgeting process affects every homeowner in your community, so excluding members can lead to dissatisfaction or pushback. Lack of transparency can also cause homeowners to feel left out of critical decisions, especially if fee increases are proposed.
Engage homeowners early in the budgeting process. Hold informational meetings, send out surveys, or create committees allowing homeowner input. Transparent communication helps build trust and ensures the budget reflects the community’s needs and priorities.
4. Overlooking Legal Requirements
Each HOA operates under a combination of state laws, local ordinances, and its governing documents. Overlooking these legal requirements during budgeting can lead to fines, disputes, or legal action.
For instance, some states mandate minimum contributions to reserve funds or limit the annual increase in assessments. Failure to comply with these requirements can invalidate the budget and cause significant financial headaches.
Consult with your legal counsel or community management company to ensure your budget fully complies with all legal and regulatory obligations. Ensure you account for state-mandated reserve contributions and other legal requirements that may apply to your community.
5. Relying on Outdated Data
Many HOA boards use last year’s financial data without accounting for cost increases or service needs changes. Utilities, vendor services, and insurance costs tend to rise over time, and relying on outdated numbers can lead to underfunding critical areas.
Update your financial data by requesting new quotes from vendors, reviewing recent utility bills, and factoring in price increases. Keeping your numbers current ensures a more accurate and reliable budget.
6. Failing to Plan for Inflation
Inflation can substantially impact an HOA’s budget, particularly regarding services like landscaping, security, and repairs. Failing to account for inflation could result in budget shortfalls when service providers increase their rates mid-year.
In 2023, 91% of community associations said they saw unexpected increases in expenses due to rising costs and inflation. The same percentage said they plan to increase their budget due to rising costs and inflation. The main areas of rising expenses were insurance, landscaping, maintenance, management fees, reserve funding, and staffing. Seventy-three percent plan to raise assessments next year, while 41% will cut expenses, and 15% will reduce reserve funding contributions.
Build an inflation buffer in your budget. Consider past inflation trends and estimate how much costs are likely to rise. This helps ensure that your community’s expenses are adequately covered, even if prices increase.
Prepare for Success
With budget season here, now is the perfect time to proactively approach your HOA’s finances. By avoiding common pitfalls—like underestimating costs, ignoring reserve funds, and failing to involve members—your board can create a comprehensive and realistic budget that meets the community’s needs now and in the future.
Need assistance with your HOA’s budgeting process? RealManage offers expert services to guide your board through financial planning, ensuring your budget is both robust and compliant. Contact us today to learn how we can support your community year-round.