Every HOA board needs to understand the HOA budget. This is an important financial tool that helps the board manage the association’s money over the next year. Moreover, it helps promote transparency by keeping homeowners in the loop. Without a clear budget, things can quickly fall apart.
What is an HOA Budget?
An HOA budget is the community’s financial game plan for a set period, typically a year. It lists everything the association expects to earn and spend. Additionally, the budget helps the board calculate homeowner dues. When board members know the anticipated costs, they can more accurately project how much the HOA will need to cover all of them.
The goal of a reasonable budget is simple: to make sure there’s enough money to cover every expense while setting something aside for the future. When a board doesn’t plan well, it ends up guessing or working in the dark. This usually leads to unpleasant surprises, such as a budget shortfall or deficit. This can result in special assessments, which always frustrate homeowners.
The budget isn’t only about money either. It’s also about building trust within the community. Homeowners want to know the board is using their dues responsibly. They want to know where their contributions are going. When the board demonstrates its capacity for smart financial management, homeowners are more likely to trust its decisions.
Who Makes the Homeowners Association Budget?
Generally, the HOA or condo board is responsible for creating the budget. Sometimes, there is a dedicated or separate budget or finance committee in charge of the task. The treasurer often leads the process, reviewing the numbers and reports. This ensures that the association doesn’t miss a thing.
Board members should remember that budgeting isn’t just paperwork. It is about anticipating what the community will need in the coming year, including repairs, insurance renewals, landscaping, and maybe even a few upgrades. Each of those decisions ties back to how money is allocated.
The best budgets come from collaboration. When multiple people review the data and give their input, the result is often more accurate and realistic. After that, the board usually revises the draft, fine-tunes it, and then presents it to the community before it is officially approved.
What Does an HOA Budget Include?
A complete HOA budget should include all the essentials: income, expenses, and reserve contributions. Each of these categories shows a different side of the community’s financial picture and how it all fits together.
1. Income
Most of the HOA’s income comes from homeowner dues, but there can be smaller sources, too. Revenue streams can also include late fees, clubhouse rentals, parking fees, or even small interest earnings from bank accounts. The key is to be realistic. Not every homeowner pays on time, so it’s better to expect a few delinquencies rather than overestimate the total.
2. Expenses
Expenses are what keep the community running day to day. This includes maintenance, landscaping, insurance, utilities, management fees, and legal or accounting costs. Some costs barely change, but others go up every year.
It helps when the board reaches out to vendors early to ask about any expected rate increases. Prices on things like water, fuel, and materials rarely go down. When the board accounts for such increases, it can save everyone from headaches later on.
Boards that underestimate expenses to make the numbers look better end up paying for it down the line. Shortfalls can lead to delays in maintenance, unpaid bills, and possibly even a dip into reserve funds.
3. Reserve Fund Contributions
The reserve fund is like an association’s long-term savings account. It is where money is set aside for major repairs that don’t happen every year, such as roof replacements, repaving, or major building upgrades.
When a board ignores reserve funding, it can create future problems. Special assessments, large loans, and significant dues increases are all possibilities. Without funding, an association’s shared elements will fall into disrepair.
Reserve funding is so important that many states have even passed laws about it. In Virginia, for example, Section 55.1-1965 of the Condominium Act requires a reserve study every five years to determine if there’s enough funding in an association’s reserves.
HOA Budget Guidelines: How to Plan One
Planning an HOA budget takes patience, organization, and a bit of foresight. It’s not something that the board can rush through. Here’s how boards can do it the right way.
1. Review Past Budgets and Financial Statements
It’s hard to plan for the future without understanding the past. The board should review old budgets and financial statements to spot trends, wasteful spending, and patterns in the community’s costs. This also gives the board a good starting point for new estimates.
2. Establish Priorities and Objectives
Before any numbers get written down, the board needs to decide what’s most important. Maybe it’s increasing reserves, repainting common areas, or replacing aging light fixtures. Having clear priorities makes it easier to divide funds fairly and logically.
3. Forecast Income
Next comes income. Boards can review dues and assessments, potential delinquencies, and any additional sources of revenue. Some communities collect rental income or charge small administrative fees. These little details matter, and every dollar adds up.
4. Estimate Expenses
Once the income side is done, the board can focus on costs. They should talk to vendors, compare rates, and check contracts for renewal terms. Prices almost always rise from year to year. The board should add a small cushion to help cover any unexpected increases.
5. Plan for Reserves
Boards must set aside money for long-term projects. Even if the association feels stable right now, roofs will eventually wear out, pavement will crack over time, and buildings will require a new coat of paint to look presentable. A well-funded reserve ensures peace of mind.
6. Draft and Review
The treasurer or committee usually prepares a draft of the budget first. After that, the rest of the board will review it. It is normal to go through several drafts before everyone agrees on a final one. This step can help the board catch any errors or unrealistic figures.
7. Distribute to Homeowners
Finally, the board should share the proposed budget with the community before final approval. In some states, associations must send homeowners the proposed budget before the ratification meeting. Apart from compliance with state laws, doing this can also help build trust.
What are the HOA Budget Best Practices?
Budgeting takes more than just math. It requires good timing, effective communication, and sound judgment. Here are some tried-and-true practices that will help boards stay ahead.
1. Begin Planning Early
The HOA board or budget committee should start planning as early as possible. It is not wise to wait until the last minute, as this usually leads to rushing through the numbers or missing key details. Boards that start early have time to compare, review, and make better decisions.
2. Consult Experts
Sometimes, boards need outside help. Accountants, reserve specialists, and community managers can all offer practical advice that the board might not consider. Their input can prevent the board from making mistakes that lead to financial trouble.
3. Consider Delinquencies
Delinquent accounts are part of HOA life. No community is immune. Boards should include a “bad debt” line item so they don’t get caught short if some owners miss payments.
4. Talk to Vendors About Possible Price Increases
Vendor contracts don’t stay the same forever. For this reason, it is smart to check in before the new budget year begins. Some vendors give advance notice of price hikes, but others don’t. Asking ahead of time can save the board the headache and stress later on.
5. Factor in Economic Changes
The cost of everything — insurance, materials, labor — tends to fluctuate with the economy. Boards that keep up with these changes make more accurate forecasts and avoid underfunding.
6. Adopt a Conservative Mindset
A conservative budget is a safe budget. It’s better to expect higher costs and lower income than the other way around. Any leftover funds can always roll into reserves or into next year’s budget.
7. Keep Homeowners in the Loop
Board members should always keep homeowners informed of the budget. It is good practice to send updates, hold open meetings, and explain changes in plain language. This shows both accountability and transparency, which helps build trust.
An Essential Financial Tool
The HOA budget is what keeps the community steady. It funds maintenance, pays the bills, and makes sure reserves don’t run dry. When the board plans carefully and communicates openly, the neighborhood can stay strong and harmonious.
TNWLC offers financial management services to community associations in Washington, DC. Call us today at (202) 483-8282 or contact us online to get started!
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