As summer winds down, another season looms on the horizon. Most people know it as Fall, but for boards of directors across the country it’s the dreaded “budget season”. Budget meetings serve as a flash point for different ideas about the community. They can cause conflict and animosity. The budget season is an excellent time to reflect on the past, consider the current needs, and look to the future. If you approach the task prepared, there is nothing to worry about. Here is a guide to ensure a successful year of community association governance. Don’t be afraid of Condo and HOA Budget Season.
Don’t be afraid of Condo and HOA Budget Season.
Prepare your Documents
Gather as many of your association’s financial documents as you can get your hands on. All you need is the previous two years, the more data you have, the more informed a decision you can make. Its the only way to prepare for condo and HOA budget season.
Do your Research
Scrutinize every line item. Try and find the shortfalls and address them. If you budgeted $20,000.00 for water last year and the actual bill was $28,000.00, that needs to reflected in the new budget. It is also a good idea to contact the water utility to see if they will be having any rate increases. All line items need to be be reviewed to see if the previous budget performed well. Budgets can go both ways, and if the board over-budgeted for line items those too must change.
Set goals for your association that include preventative maintenance, capital improvements, and reserves. Review anything that might improve the quality of life and increase property values. There are projects that are on the back burner and its time to spend a little money to improve your community. This improves property values and the residential experience.
Hunt For Value
Look for a bigger bang for your buck. Work with your existing vendors to see if they can reduce their prices. Call them in for a meeting with the board and check their contracts for built in increases and renewals. Now is a good time for the board to shop around and see if other vendors can perform the same tasks for less money. But remember, “value is remembered long after price is forgot.” Don’t jump at the lowest price, make sure you are getting a good deal, not a cheap one.
Focus On Big-ticket Items.
Review the top three line item expenses. These will be insurance, utilities, and labor costs. Don’t renew your insurance coverage without a review. Call in your broker and discuss with them if you have too much coverage or too little. See if there are alternative carriers who will write the same policy at a cheaper rate. There are savings in your water and electricity bills. A great idea would be to call in some experts to review usage. LED lights and water saving devices can cut thousands off your budget.
Treat The Problem, Not The Symptom
Putting band aids on problems will only cost your association more money in the long run. If you have been patching up a roof every year its time to replace it. Don’t wait for things to break down as that will cost you more money in the long run. Building a budget requires the board to predict needs of the association.
Review your delinquencies and create a line item for bad debt. Although the economy is in good shape there are always delinquencies and foreclosures. If your community has lost money due to a bank foreclosures you will experience it again. It’s a guess but you need to consider bad debt and budget for it. Like it or not, its an expense and needs to be in your budget. You should have a discussion about your current system used to collect delinquencies. Putting a lawyer on a file only to have a bank come in an foreclose on the unit is an expense that you can never recover. Consider a collection agency to manage your delinquencies and slow payers. They don’t charge unless they collect.
Fund the Reserves
Many associations do not fund their reserves as they should. This is a cardinal sin of governance and could compromise your community. Funding the reserves will raise maintenance fees. Yet it is a lot better than having to hit your owners with special assessments. Capital improvement projects will come along and its nice to have it all saved up for. Hire a reserve specialist before you create your budget. Know what you will be needing to spend in the future and budget for it. Include reserves in your budget. This is critical and it speaks well to the governance of the association and the property values.
Put it all Together
After you have gone through every step in this process, have a meeting and plug in the numbers. Model out your budget in a spreadsheet, and it will give you an idea of what your budget will look like. Its natural for maintenance fees to increase every year. As your association grows older and with inflation you will have more expenses. Unless you have found significant savings maintenance fees will increase. This is where Condo and HOA Budget Season can get difficult.
As you craft the budget for the coming year consider the special needs of your community. Reviewing your most recent financial reports, and previous budget performance is critical. Do not dismiss the importance of reserves. Reserves are the cornerstone of success for your community association. All this will prepare you to make the best and most accurate budget possible for the next fiscal year. Keep all the board members in the loop and take the input of owners who are not on the board. All budgets get challenged by members who are not familiar with the process. Be ready to explain and defend the increases to the membership.
The financial governance of a condo or HOA does not end with the adoption of the annual budget. This is a month to month process where the board reviews the budget against actual costs. These steps are central to the fiscal health of a community and it’s property values.