Expenses for the Association
Your HOA probably has many recurring expenses that can be calculated with reasonable accuracy.
- Services from the city (trash removal, water and electric for shared areas, etc.) are fairly predictable. These may go up year over year, or the amount of usage may change, causing slight increases.
- Maintenance is another area where expenses can add up, whether that’s landscaping or pest control. Most of these are planned expenses and may be similar from one year to the next. Major repairs often fall outside the expected budget and may require a special assessment.
- HOA insurance and payment for professional services (such as bookkeeping) are necessary to keep the HOA in compliance. Sometimes renegotiation for lower rates is possible. For example, finding ways to make the HOA a better risk could lower premiums for coverage.
- Operational costs and equipment for site amenities like a clubhouse or gym should be added into the budget as well.
Income from Dues and Money for Reserves
The amount you are currently bringing in from HOA fees should more than offset the amount of planned expenses. But that’s not happening if you have a lot of delinquent homeowners in the community. This can seriously impact the ability for your association to meet its financial obligations. It also means you need to have a bit more money in reserves to see the HOA through lean times. Reserve funds are also used to cover major expenses in an emergency or to fund big improvement projects. Any surplus from the previous year should be carried over in the reserves but not used as part of the current year’s budget when it comes to determining assessments.
Calculating HOA Assessments for Expenses and Reserves
One common approach to budgeting and allocating funds is to assess fees that cover 150% of expected expenses. That means two thirds of the annual fees go to covering expenses and one third can go into reserves. Keeping reserves well-funded makes it less likely that your HOA board will need to make a special assessment during the year. While members may grumble about their monthly statement, they are more likely to accept a known fee than to comply with a sudden demand for an additional lump sum. Remember, when you budget well, your homeowners can have better control of their own budgets.
Fees are often an equal amount for each homeowner, but they may also take into account property size and other factors. Follow the guidelines in your HOA’s governing documents, and make sure no board or committee members are getting a special break. Billing in twelve equal installments is the most common practice, since most homeowners don’t want to pay a large bill all at once.
Inform homeowners about how their assessments are calculated, including what factors may have changed since the previous year. Communicate early and often about any upcoming changes that could impact their fees in the coming year. The more you educate homeowners about HOA assessments, the more they can appreciate what goes into making their community thrive.
Prioritize collecting delinquent payments. It’s unfair to raise assessments due to unpaid fees, since it forces responsible community members to pick up the slack for those who don’t pay their bills. Delivering bills electronically and accepting payment online can help ensure members pay invoices on time.
Need help analyzing your budget and calculating HOA assessments? Contact our team for guidance.