The HOA budget plays an essential role in the operation of a homeowners association. Without a budget, an HOA would have no financial direction. Creating a budget, though, is not as easy as it might seem.
What Is an HOA Budget?
An HOA budget is a financial planning tool that a homeowners association uses to plan its expenses for the year. Associations also use budgets to calculate how much money they need in revenue to cover anticipated expenses. From there, associations can determine how much each homeowner must pay on HOA fees.
The Importance of an HOA Budget
It is essential to have an HOA budget in place so that an association can have a financial guide. The annual budget sets expectations for the year, allowing homeowners to understand where their money is slated to go. Without a budget, an HOA would not know how much it needs to collect from members to meet its funding goals.
Components of an HOA Annual Budget
There are three basic parts to an HOA budget:
- Expected Revenue. This is the amount of money the association expects to earn in revenue. An association primarily uses HOA fees as its source of income. However, an HOA may earn money from bank interest, rental income, and other avenues.
- Anticipated Expenditures. This section lists the expenses the association expects to incur during its annual operations. The anticipated expenses break down the costs per line item. They can include items such as cleaning fees, maintenance costs, landscaping fees, insurance premiums, office supplies, and more.
- Reserve Funding. If an HOA is required to maintain a reserve account by state law or its governing documents, it is part of the HOA budget requirements to allocate reserves.
How to Plan a Homeowners Association Budget
Preparing a budget is a crucial part of an HOA board’s responsibilities. Unfortunately, not everyone has the insight or experience to execute this task effectively.
Regarding HOA budgeting, here are the steps for creating a plan.
1. Put Together a Team
First, it is important to assemble a budget team. More often than not, an HOA has a designated committee in charge of HOA finances called the finance committee or budget committee. The HOA board can enlist the help of this committee when planning the budget.
2. Set an HOA Budget Meeting
While the HOA board may feel tempted to include budget preparation in one of the board meeting agendas, it is best to schedule a separate meeting dedicated solely to the task. This way, board members can pour all their attention and energy into the budget.
A competent HOA board should start preparing the budget ahead of time. This will give the association enough time to consider all the factors in budget planning. It also ensures sufficient time to put together the actual budget and present it to the membership at the annual meeting.
3. Set Priorities
Planning a budget requires finesse. The HOA board should understand the association’s immediate needs and prioritize them accordingly. Maintenance and repairs, for instance, tend to be more important than beautification projects. If there aren’t enough funds for both, it is best not to defer maintenance since it typically has more serious consequences.
4. Examine Current Health and Past Budgets
One of the best practices for planning the HOA budget is to examine the association’s current financial health and past budgets. Historical and present data will help inform the board’s decisions.
For example, if previous budget reports show that the HOA consistently spent more money on actual landscaping costs than anticipated, it is best to account for the discrepancy early on. Increase the anticipated expense for landscaping this year or cut back on actual costs. Past budget reports should help the board when coming up with estimates.
5. Consider Fluctuations
Expenses can change over time. So, while it is a good idea to use historical data to determine ballpark figures, it is crucial to understand that costs tend to increase year after year.
Additionally, economic factors can also influence anticipated costs. Inflation is big, impacting not just associations but corporations of other shapes and sizes. Rising wages and increasing costs of goods and services can also cause prices to spike.
6. Get Estimates
Don’t be afraid to call vendors and providers for estimates. This is a good way to anticipate any changes in the annual budget from the previous year.
Vendors usually raise their prices annually. Insurance providers may also change their pricing structures and hike premiums based on external factors. Associations in many states are facing a crisis of expensive insurance due to bad weather and the effects of climate change.
7. Factor in Reserves
The annual budget should reflect reserve funding if an HOA is required to maintain reserves. Homeowners contribute to the reserve fund, which covers the cost of deterioration of major assets or components. Even if an association isn’t required to maintain reserves, smart HOA financial planning dictates that it does so anyway.
How much should you deposit in HOA reserves every year? Unfortunately, there is no one-size-fits-all amount. The answer depends on the specific association’s reserve study, which should outline the HOA’s reserve requirements and funding plan.
8. Notify and Approve
Depending on state laws and the governing documents, an HOA may be required to present its budget to homeowners for ratification. In Texas, Section 209.0051(h)(12) of the Texas Property Code states that approving the annual budget must take place at an open meeting for which homeowners were given prior notice.
Plan Wisely
A homeowners association clearly can’t function without a proper HOA budget. The budget sets the financial tone for the year and is used to determine HOA fees. The lack of an annual budget will only cause an HOA to operate blindly and spiral out of control.
88 Doors offers assistance with HOA budget planning. Contact us online or call us today at (512) 348-8821 to get a quotation!