Sometimes it can be hard to prepare Homeowners Association Budget. Especially now, when money is tight, and homeowner associations may be feeling the strain of rising receivables.
Presently the law makes no provision requiring the funding of reserves, although some of the government’s insuring agencies are demanding to see at least 10% funding annually. What should the Board of Directors or Property Management company do?
What is a Homeowners Association Budget?
Usually, the Homeowner Association’s budget starts with various income sources. Then goes the expenses divided into administrative, common area repairs, utilities, and the reserve deposit. The reserve deposit is where they should start. All too often the reserve deposit is the balancing number between the expected income and the expected regular expenses.
In the property management company’s view, the process should start with an analysis of the reserve study and its projections. A third party usually prepares the reserve study. It provides a dispassionate view of the number of years a capital item has life and its anticipated replacement cost. They include a modest projected interest rate on both the funds being reserved and the likely cost when the item is to be replaced.
Besides, a third party can propose various scenarios for achieving full funding of the reserves and alternative plans for shorter terms from that study. The Board of the Homeowner Association should review that study and select a rate at which they choose to fund the reserves to meet a specific objective, such as to be 60% funded in say, five years.
From that decision, they can determine what amount to set aside for the forthcoming years as a reserve deposit each month.
Then working upwards, they would determine to say the cost of utilities for the ensuing year, followed by maintenance and administration. The sum of these costs will provide a total expense for the coming year. Divide that by the number of units, and that is the amount of monthly association dues needed from each unit annually.
Sadly, Homeowner Association Boards and Community Managers start from the top and decide not to increase dues FIRST and then shuffle the numbers to fit that scenario leaving the reserve amount until last. It is the leftover difference between income and expense.
While that will make perfect arithmetical sense and be precisely correct, it makes consideration of the reserve study almost worthless.
How property management can deal with HOA budgets?
Back in 2006, we suggested making a provision for bad debts. There were howls of derision –
“That will mean we have to raise the dues; we have no money for that.”
When the year’s results came in, the lack of a provision resulted in a shortage of funds transferred to reserves. Following our suggestion, at least in the drafting stages, it allows an association to see the real cost of doing business and, therefore, the necessary dues required.
Any shortages can be seen in advance, and perhaps alternative changes to the line items can be made to cover whatever the study suggests an increase in dues.