Budget for HOA Success

by Richard Thompson of Realty Times

Every homeowner association needs a well crafted annual budget to calculate the fees to be paid by the members. For most HOAs which have a fiscal year starting in January, the fall prior to that is budget review time. A review and revision should happen each year without exception because costs change every year. Failure to revise (read "increase") each year will put the HOA deeper and deeper in the hole. There are number of areas that every budget review should include:

Historical Operating Expenses. Examine the most recent 12 months' expenses to determine your base for each expense line item. Scrutinize line items that are larger than normal to determine if there was an anomaly that is not likely to repeat the next year. If so, don't include it.

Anticipated Increases. Utility costs typically increase every year. Contract services also are subject to increase. Call your utility and service providers and ask them if there will be an increase in the coming year.

Contingency. HOAs often experience unforeseen expenses and/or revenue shortfall. Add 5-10% of the total budget to cover this.

Reserve Funds. Every HOA should set aside funds for future common element repairs and replacements. Both Fannie Mae and Freddie Mac (the entities that underwrite most home mortgages) require at least 10% of the condominium annual revenues be dedicated to reserves. For HOAs with little common area or few common elements, 10% may suffice but condominiums often need 25% or more of the annual budget dedicated to this purpose. Only a reserve study done by a qualified professional reveals the answer. For a list of professionals that hold a PRA (Professional Reserve Analyst) credential, the highest available in the industry, go to www.apra-usa.com Some boards fail to raise HOA fees each year because:

1. Some members are on fixed incomes. While this is true in virtually every form of housing, the board needs to remember that every member's property is affected negatively if repairs and maintenance are deferred due to lack of money. The truth is that some homeowners may have reached a point where downsizing makes sense. And unless the board gets the other members' consent to subsidize the members who don't have enough money, the response to those that can't pay should be "we sympathize but the budget needs to be adequate to maintain the common elements." The board that keeps the budget artificially low for this reason bears personally responsibility for the consequences.

2. They don't want to look like bad guys. The board is elected to run the HOA like a business. It takes money to run a business properly. While no one wants to pay more than it costs, few members are naive enough to think costs don't go up each year. The board that ignores reality is personally responsible for the results.

3. They disagree with the reserve study provider's recommendations. While it's possible that a reserve study may be flawed, few board members are qualified to perform one so the board needs to be careful in dismissing recommendations that call for more money to be put into reserves. The average condominium should be setting aside 25-35% of the annual budget to address reserve needs (and more if the funding level is low). If less than that is being reserved, it increases the likelihood of a special assessment which inevitably falls on members that shouldn't have to pay it and on others that are financially unable to pay it. Reserves are best funded monthly, in the case of condos, or quarterly, semiannually or annually in the case of homeowner associations which have modest reserve needs.

4. HOA fees need to match neighboring HOAs. The financial fingerprint of each HOA is unique...no two are alike. The budget needs to be based on the specific services required to maintain the operation and reserves, not what the Joneses are doing. The Joneses may be headed for disaster. Even similar HOAs can have very different financial requirements. Some have higher insurance premiums due to prior claims. Some have funded their reserves appropriately, some are catching up, and some haven't even started yet. Some take care of repairs on a pro-active basis and some have deferred maintenance. Some have earthquake insurance, cable TV and internet access and some don't. In other words, the "HOA fee" doesn't include the same costs in all complexes so comparing the bottom line without knowing what created it is meaningless. Your HOA fees should be based on specific needs, not the neighbor's.

What about cost cutting? Most HOA expenses are not discretionary but there are some areas with great potential for savings, such as:

Insurance. Increasing the insurance deductible lowers the premium. However, if this is done, there should be an Insurance Deductible reserve spread over, say, three years to cover at least one claim. If no claims are filed during the three years, the money is saved.

Landscaping Renovation. Older HOAs often have vast turf areas which are very expensive to maintain. Replacing turf areas with planting beds filled with drought resistant plants and bushes can dramatically reduce costs.

Lighting. Compact fluorescent bulbs use 70% less energy and last years longer than traditional incandescent bulbs. They usually work with existing fixtures and the brighter light they cast enhances security.

Heating & Air Conditioning. If the HOA provides central heating and air conditioning, it is often worth installing new energy efficient equipment. Your utility company usually can provide you a cost/benefit analysis. The older your existing equipment, the faster the payback.

Hot Water Heating System. The same cost/benefit approach applies to central hot water systems. Investing in new equipment can often pay back in only a few years with the energy costs savings.

Pool Solar Heating Equipment. Pool heating costs can easily be one of an HOA's biggest expenses. Solar hot water heating equipment can substantially reduce energy costs and pay for itself in only a few years.

Add Natural Lighting. Common areas can often benefit from devices like Solatube www.solatube.com which capture, concentrate and focus sunlight into dark interiors, reducing the need for electric lighting.

As the Green Revolution expands it's footprint, there are more sustainable energy saving alternatives to consider. Some are low tech and some are higher than high but all are designed to stretch your dollars. For more energy saving and cost cutting information, see the US Department of Energy website

In the final analysis, the board is charged with running business in the best interest of all members. Sometimes that means ruffling a few feathers. But the board has the fiduciary duty to set the HOA fees at a level that is adequate to cover realistic operating and reserve expenses. Budgeting for success means planning, leadership and execution.