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How to Build a Responsible HOA Management Budget

Navigating the budgetary needs for a homeowners association is one of the trickiest elements of serving on the board. Estimate too high and you risk having to raise monthly HOA dues, creating frustration among homeowners. Budget too little and you’re forced to impose costly special assessments for major projects… which also causes dissatisfaction for homeowners.

This article will show you how to take a deliberate approach to building a responsible budget that hits the sweet spot between keeping fees manageable while achieving high service levels.

How does your board approach budgeting?

HOA boards usually adopt one of two long-term financial planning philosophies:

  1. “Here’s the fixed dollar amount that we want for our monthly dues. Let’s find a way to manage to that.”
  2. “Here’s the service level we want from our HOA. Let’s discover what that costs, then value engineer around it.”

We understand that keeping dues as low as possible is a noble cause and is also a political win among homeowners. Unfortunately, freezing dues or selecting an arbitrary number that “sounds good” doesn’t align with the realities of successful long-term HOA management.

Instead, we recommend beginning with the end in mind. That is, envision the type of community that will elevate property values over time (or at least hold them steady), determine the association-controlled factors that contribute to achieving that vision, then start building a financial plan that enables the association to meet those objectives in both the short- and long-term. 

Protecting property values should drive all decision-making

The first steps of planning your budget have nothing to do with numbers. The true beginning of the budget conversation starts with the board answering these crucial questions:

What aspects of the community drive property values? Think about everything in the community that has the potential to impact property values in the future. Every community is different, but here are some of the most common considerations:

  • Entrance
  • Landscaping
  • Amenities (pool, clubhouse, sports complex, recreational areas, etc.)
  • Perimeter fencing & walls
  • Aesthetic of homes
  • Sidewalks
  • Street maintenance
  • Community events

What are the association’s documented responsibilities under the Covenants, Conditions & Restrictions (CC&Rs)? These include obvious things like the pool, sports centers, common area buildings, gate/entrance, as well as less obvious things like electrical work for common areas, in-wall plumbing in condos, structural support for perimeter retaining walls, etc.

Pay attention to the connection between the things that make your community a great place to live and the obvious and unseen responsibilities your association is tasked with managing.

Evaluate line-by-line

After reviewing community aspects that preserve and promote property values, go through your budget, line by line, and discuss the cost of services. Think beyond maintaining the status quo. Assess the realities of a major overhaul or full replacement of amenities that no longer serve the needs of members.

This ‘zero-based budgeting’ approach requires all expenses to be justified for each period. By evaluating the property-value-drivers in your HOA and what your association is legally responsible to provide, you can build your budget around your true financial needs for the upcoming period. This approach requires rethinking what you may have paid in the past for certain services and asks you to look closely at the service levels you receive to determine if they truly match your community’s needs.

When associations try to retrofit service levels into a hard number, they end up with no choice but to slash service levels to fit into their budgetary parameters. The association cuts corners and suffers in the end: either by foregoing necessary updates and upgrades or by instituting surprise special assessments on the membership to cover avoidable financial shortfalls.

Artificially suppressing dues creates problems down the line

Holding dues steady year-over-year might initially please the membership, but it sets the association up for unseen challenges that lay ahead. Operational costs tend to rise 1-2% annually in every industry – and HOA management is no exception. If dues do not track with this increase, the association is falling behind. At some point, a huge increase (15-20%) will be required, which will likely upset the membership more than a steady increase.

Suppressing dues may also create a budgetary shortfall, forcing the association to levy special assessments. Special assessments must be shared publicly on real estate disclosures and can therefore adversely affect property values.

The smartest course of action is to ensure dues align with true, current and expected costs of maintaining the association, then letting the membership know where their dues are allocated and the justification behind any increases. Communicating the ‘why’ behind the dues will help homeowners better understand and eliminate much of the grievances.

Invest in the future

HOA management is not the place to be penny-wise and pound-foolish. As a non-profit entity, the funds in an HOA are there to be used – either spent on operations or held in reserves. Every budgetary decision you make has the potential to increase or sustain property values. Therefore, a responsible HOA budget recognizes the realities of today as well as the expectations of the future.

Want help evaluating the strength of your HOA’s budget? Our experienced HOA managers can provide insight and guidance.

Do HOA better.

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