A condo reserve study is a valuable tool that condominium associations should use to protect financial health. Reserve studies allow the condo board to plan for the future. They can prevent unnecessary special assessments or significant increases in condo fees.

What is a Condo Reserve Study?

A condo association reserve study is a detailed analysis of a community’s finances and assets. It reviews the current reserve fund and inspects physical assets. This inspection helps estimate each component’s useful life and the cost of repairs or replacements.

The reserve study helps prepare the condo association for future expenses. It estimates when assets will need repairs or replacements and the related costs. Based on this, a funding plan outlines how much the association must save annually to meet these financial obligations.

Without a reserve study, associations can be caught off guard by asset failures. This could lead to sudden, significant increases in dues or large special assessments.

Parts of a Condominium Reserve Study

A condo reserve study has two parts: a physical and financial analysis.

• Physical Analysis. The physical analysis inspects the association’s assets, mainly common elements, evaluating their condition, lifespan, and replacement costs.
• Financial Analysis. The financial analysis reviews the current reserve funds. It calculates how much the condo should save to cover repair and replacement costs due to wear and tear. A funding plan ensures the condo has enough funds for these expenses.

Condo Reserve Study Requirements in Florida

Certain requirements apply to reserve studies for condo associations, which will depend on state laws and the condo’s governing documents.

After the 2021 collapse of Champlain Towers South, Florida introduced stricter requirements for condo associations. A structural integrity reserve study (SIRS) must be completed by December 31, 2024. Unlike a typical reserve study, a SIRS focuses on the physical condition and strength of the building.

Milestone Inspections

Buildings must also undergo milestone inspections. For those three miles or more from the coastline, this must happen by the end of their 30th year after receiving a certificate of occupancy. 

The milestone inspection must occur by the end of their 25th year for buildings within three miles of the coastline. After that, inspections for both building types must occur every 10 years. Buildings with three or fewer stories are exempt.

Accounting Records

Section 718.501(1)(c) requires associations to keep reserve studies for at least 14 years. Accounting records should also include financial reports, statements, reviews, and audits.

Condominium Financial Reporting Rules

Section 718.111(13) requires associations to present a summary of reserves in financial reports and estimate how much it will need annually to fully fund reserves for each item using the straight-line accounting method.

Annual Budget Requirements

Section 718.112(f)(2) mandates that the association’s budget includes reserves for items with replacement costs of more than $10,000, based on the latest reserve study.

Suppose an item is not listed in the most recent reserve study. In that case, the association must calculate the reserve amount based on the asset’s estimated remaining useful life and the cost of replacement or deferred maintenance. This rule applies even if a reserve study has not yet been completed. 

Every year, the association must adjust reserve assessments to reflect changes in asset condition or maintenance costs. From December 31, 2024, associations can no longer vote to waive or underfund reserves.

Study Frequency

Condo associations in Florida must complete a structural integrity reserve study by December 31, 2024. Starting in 2025, they must use this study to inform their annual budget. Additionally, milestone inspections are required every 10 years after the first inspection, at the 30th or 25th year, depending on the building’s proximity to the coastline.

No Waiving

Previously, associations could waive reserve funding with a majority vote. However, under the new law, associations can no longer vote to waive or reduce reserve funding.

How Much Does a Condo Reserve Study Cost?

A full reserve study is the most expensive since it includes a site inspection and a 30-year funding plan. An updated study with a site visit is cheaper but requires a new 30-year plan. The least expensive option is an update with no site visit.

Costs vary based on service levels, location, and other factors. Typically, reserve studies cost between $500 and $10,000.

How a Condo Reserve Study Prevents Increased Fees

A reserve study helps prevent dues increases and special assessments in a condo association by providing a detailed roadmap for future financial planning. It analyzes the association’s physical assets and determines how long these components will last before they need repairs or replacements. The study also estimates the cost of these repairs or replacements and provides a funding plan.

By regularly conducting a reserve study, the condo association can set aside small, manageable amounts of money each year into a reserve fund. This fund acts as a savings account for large-scale repairs or replacements. As a result, when these expenses arise, the association already has the money saved to cover the costs. This eliminates the need for sudden, drastic increases in dues or imposing special assessments on unit owners.

People prefer dues increases or special assessments, especially in large amounts. These unexpected costs can create tension within the community and even cause financial hardship for residents who need to prepare for large, one-time payments.

For the Benefit of Everyone in the Condo Community

A well-prepared condo reserve study can improve the association’s financial health by ensuring there is always enough money available to maintain the property. This helps maintain property values and keeps the community in good condition. In the end, a reserve study benefits everyone involved.

Freedom Community Management provides condo management services in Florida, including assistance with reserve management and planning. Call us at 904-490-8191 or contact us online to learn more!

Financial planning for HOA communities is not as easy as it looks. Often, it takes more than creating an annual budget to keep the neighborhood financially healthy. The board should also adopt good financial planning practices to ensure growth and preserve property values.

How to do Financial Planning for HOA Communities

A homeowners association relies a lot on its finances. After all, it costs money to maintain the common areas and meet the HOA’s legal obligations. It also takes money to enhance the community with capital improvements like infrastructure upgrades or new amenities.

For these reasons, financial planning for HOA communities should be a priority. With proper planning, the HOA might avoid falling into debt or levy large special assessments to cover unforeseen expenses. 

1. Conduct a Thorough Assessment

A comprehensive assessment of the HOA’s upcoming projects, ongoing maintenance, and other needs is vital to planning. Doing so allows the HOA to know what funding it may require in the foreseeable future. It also gives the HOA a good basis for creating its annual budget.

How can an HOA conduct an assessment? Apart from laying out all the work it needs, the board may also analyze historical data to estimate future spending. They can review the community’s financial statements and reports to identify trends. It should also help them estimate the cost of future expenses and set realistic goals. 

2. Estimate Income

HOA income usually comes from homeowner assessments, fines, and charges. It’s important to evaluate how much income the HOA has been earning for the past couple of years to estimate future income. This way, the HOA will know whether or not to raise fees, levy additional special assessments, or cut down on costs.

3. Prioritize Dues Collection

Collecting HOA dues can be cumbersome and difficult for many self-managed associations. The board members only sometimes have the time to go door-to-door to collect fees. Nevertheless, the HOA should prioritize dues collection to remain financially stable.

If the board does not have the time or energy to collect dues manually, they can outsource the task to a collection agency or HOA management company. They can also use online platforms so residents can set up automatic payments and reminders for monthly dues.

4. Prioritize the Necessities

Large HOAs may pay for many luxury expenses, such as community events, valet services, and concierge services. While these certainly add to the overall living experience, they also increase the cost. 

If the HOA is in a bad financial spot, consider prioritizing only the necessities. The necessities include routine maintenance, utilities, common area cleaning and upkeep, and insurance. These are usually what keep HOAs running, so it’s important to prioritize them in the financial planning process. If the HOA has a bit of extra income, it can allot a budget for the extra services and facilities.

5. Create a Contingency Fund

Contingency funds or reserve funds allow HOAs to set aside money for unforeseen expenses and major repairs or maintenance. They ensure that the HOA will remain financially stable even if an unexpected flood or fire occurs.

Ideally, associations should aim for fully funded reserves. However, if that is not possible at the moment, try to keep the reserves funded by at least 70%. 

6. Review and Adjust Throughout the Year

Financial planning for HOAs does not stop at creating a budget. HOA boards must be adaptable and adjust to any unforeseen events. It’s best to review and adjust the budget regularly each quarter. This way, the board can account for unexpected developments, additional needs, and changes in expenses.

7. Create a Long-Term Plan

A long-term financial plan for an HOA can be beneficial in many ways. For one, it allows the HOA to set a target for the next couple of years and create a budget tailored to meet those objectives. 

In addition, an HOA 5 year plan or even 10 year plan can help the community ensure financial stability. It helps the board make more responsible financial decisions knowing that they have a goal to achieve in the long term.

Long-term plans also prepare the HOA for future expenditures. They can set aside a budget for a major repair or renovation. The board can set the right amount to levy in monthly assessments to cover those future expenses. 

8. Involve the Community Residents

HOA board members might be tempted to create the budget themselves. While this may be more efficient than involving too many people in the budget creation process, the HOA should still involve the residents while planning the budget.

The board can involve residents by sharing proposals, conducting meetings, and gathering feedback from homeowners to ensure the HOA is addressing all residents are heard. This allows the members to raise their concerns and fosters a better sense of community.

9. Explore Cost-Saving Opportunities

There are many ways an HOA can minimize costs besides reducing its operations. For instance, the HOA can consider energy-efficient technologies to save money on utilities like electricity. Leveraging bulk purchasing opportunities may also be helpful to optimize spending. 

Additionally, HOAs may even negotiate their vendor contracts so they get the best deals. If a vendor is no longer affordable, the board can consider finding a different contractor offering more value. 

10. Use Technology

HOA management and financial management software allow associations to streamline their budgeting and financial management processes. Good software can generate reports, calculate future spending, and track current expenses. 

The best software can even provide financial analytics and insights to show the board where the HOA is headed financially. As a result, the board does not need to conduct a separate financial analysis as the software does the bulk of the heavy lifting.

11. Explore Alternative Income Sources

Homeowners associations are not limited to HOA fees and assessments. Planned communities can also use alternative sources of income to increase their budget. Consider opportunities like partnering with local businesses, renting out common areas, and hosting programs and events that generate additional revenue. 

Effective Financial Planning

It’s crucial to prioritize financial planning for HOA communities. Without proper planning, the community can easily fall into debt or not have enough to maintain the common areas. As a result, the board may fail to meet its fiduciary obligations to the community. The community will suffer as the residents may need to pay higher fees or special assessments.

Freedom Community Management offers robust financial management and community management services to Florida HOAs. Contact us online or call us at 904-490-8191 for more information!

Creating an effective HOA budget is vital for ensuring financial stability and meeting community needs. A well-planned budget allows a homeowners association to manage expenses, maintain common areas, and plan for future projects. It also ensures transparency and accountability.

What is an HOA Budget?

A homeowners association budget is a financial plan outlining the expected income and expenses of the association over a specific period. It is typically prepared annually and serves as a roadmap for managing the community’s resources. It helps the board allocate funds to maintain common areas, handle repairs, and meet operational costs.

The primary role of the budget in an HOA is to ensure enough funds to cover both regular and unexpected expenses. A well-prepared budget allows the association to collect adequate dues from homeowners while maintaining a reserve fund for future costs. It also promotes financial transparency and helps avoid legal issues by adhering to state laws.

The board can calculate each owner’s regular dues from the HOA budget. Proper budgeting and collection prevent the need for special assessments, which tend to be significant in amount. For this reason, homeowners often dislike special assessments.

How to Plan an HOA Annual Budget

Planning an HOA budget involves several important steps to ensure the community’s financial health. Board members should familiarize themselves with these steps to conduct a productive and effective HO(budget meeting).

1. Review Previous Budgets and Financial Reports

The first step is reviewing past budgets and financial statements. This helps identify trends, recurring expenses, and unforeseen costs that may impact the next year’s budget. Historical data is a good starting point for future planning.

2. List All Expected Income Sources

Board members should identify all sources of income, including monthly dues, special assessments, or rental income (if any). Typically, an HOA’s primary income source is from monthly dues. 

3. Estimate Operating Expenses

The next step is to create a detailed list of all necessary operating expenses. These include utility costs, insurance premiums, landscaping expenses, and management fees. The board must consist of every possible operating expense to avoid shortfalls in the budget.

4. Include Maintenance and Repair Costs

Don’t forget to factor in the costs for regular maintenance, including any anticipated repairs. Larger projects, such as roof replacements or exterior painting, should also be accounted for well in advance. This way, the board can spread the cost over several months to make it less burdensome for homeowners.

5. Allocate Funds for the Reserve

A portion of the budget should go toward the reserve fund. This fund is essential for covering major repairs or replacements in the future. With a reserve fund in place, the board can avoid levying special assessments or increasing the dues significantly.

An HOA board should conduct a reserve study to determine how much reserve money is necessary. This study includes a funding plan that dictates the requirements for annual contributions to meet future financial obligations.

6. Prepare for Unplanned Expenses

It is wise to always plan for contingencies. An HOA board can do this by setting aside additional funds for unexpected expenses. A cushion ensures the HOA can cover unforeseen costs without negatively impacting the budget.

7. Present the Budget

After drafting the budget, the board should present it to the rest of the board members and then to the community members. Allocating a time to present the budget allows members to review and approve it. This step helps build transparency and trust between the HOA board and homeowners. In some states, a budget approval meeting is even mandatory.

8. Monitor and Adjust

After finalizing the budget, spending must be continuously monitored to ensure the HOA stays within its financial limits. If unexpected expenses arise, the board may need to adjust to balance the budget and avoid a shortfall.

Florida HOA Budget Requirements

Florida has specific requirements regarding HOA budgets. These rules differ slightly between condo associations and homeowners associations.

For Condo Associations

Florida condo associations must follow stringent rules when creating their budgets. The Florida Condominium Act Section 718.112 requires a detailed, line-item budget to be prepared each year. This budget must include all projected income and expenses for the upcoming year and reserve accounts.

The board must provide homeowners with a copy of the proposed budget at least 14 days before the budget meeting. The final budget should be approved by the board of directors during this meeting, and homeowners must have a chance to review and comment on it.

For Homeowners Associations

Homeowners associations in Florida also have specific budgetary requirements. According to the Florida Homeowners Association Act Section 720.303, HOAs must prepare an annual budget that outlines the estimated revenues and expenses for the upcoming year. This budget must also account for reserves, though there is more flexibility in managing reserves than condo associations.

Like condo associations, HOAs are required to provide homeowners with a copy of the proposed budget in advance of the budget meeting. The meeting must be open to all members, and the board of directors must adopt the budget during it.

One important distinction for homeowners associations is that Florida law allows them to opt out of reserve requirements if the membership votes. However, it is best not to waive this requirement, as the reserve fund plays a critical role in ensuring the association’s financial stability.

All Things Said and Done

The HOA budget is an important tool in financial planning. Homeowners associations and condominiums alike should have an annual budget in place. This budget helps ensure that the association meets its financial obligations. In the end, the budget safeguards the association’s future and has a domino effect on property values.
Freedom Community Management provides HOA financial services in Florida. Call us at 904-490-8191 or contact us online to learn more!

An HOA reserve study is important in an association’s budget planning process. This study contains valuable insights into an HOA’s financial health and reserve requirements, informing the board’s decisions.

What is an HOA Reserve Study?

A homeowners association reserve study comprehensively analyzes a community’s finances and assets. It involves examining the association’s current reserve fund and inspecting its physical assets. This inspection determines the estimated useful life of each component and calculates the cost of repairs or replacements.

The purpose of a reserve study is to prepare the HOA for future financial obligations. It estimates how much time is left for each physical asset and how much it will cost to repair or replace them. From there, the analyst will come up with a funding plan, dictating how much the association will need in its reserves to pay for these costs and how much it must set aside every year to meet this requirement.

With a reserve study, associations would have a chance of knowing when their physical assets will expire and how much they will need to pay for the repairs or replacements. All of this would come as a surprise, forcing board members to significantly raise dues or collect hefty special assessments to meet financial obligations.

Components of an HOA Reserve Study

There are two components of a reserve study: the physical analysis and the financial analysis.

The physical analysis of a reserve study involves inspecting the association’s physical assets, which usually refer to the common areas and any element that the association is responsible for. It considers the inventory, the physical condition, the life estimates, and the valuation estimates. This portion of the study also includes estimates of the cost of repairs and replacements.

The financial analysis of a reserve study involves a detailed review of the association’s current reserve funding. It determines how much the association will need to set aside in its reserve account to meet the costs of repairs and replacements brought on by deterioration. It includes a funding plan that helps ensure the association has the funds necessary to pay for these expenditures.

What Should an HOA Reserve Study Include?

Although a reserve study consists of two major components, several line items must appear in a thoroughly prepared study. As such, associations should hire a reserve study company that employs industry experts, including engineers and accountants who have experience dealing with HOAs. It is also a good idea to look for CAI-accredited professionals.

According to the Community Associations Institute, a reserve study must include at least seven items. These seven items will guide the association in budget planning and financial preparation.

The seven items to include in a reserve study are as follows:

1. A summary of the reserve fund financial status of the association as well as the association’s physical description and number of units
2. A projection of the starting balance of the reserve account, recommended contributions, anticipated reserve expenses, and the anticipated ending balance of the reserve account for a minimum period of 20 years
3. A tabular list of the component inventory, quantity, description, total useful life, remaining useful life, and current replacement cost
4. A description of the goals and methods used in determining the fund status and developing the funding plan
5. All the sources used to calculate the cost of repairs and replacements for the components
6. A description of the level of service in the preparation of the reserve study
7. The fiscal year that the reserve study serves

Supplementing these seven items with graphs, diagrams, tables, photos, and spreadsheets to visualize the data is wise. These visualizations allow board members to understand the findings more easily and better plan for the HOA’s future.

How Much Does a Reserve Study Cost?

A full, comprehensive reserve study tends to be the most expensive because it is in-depth, requires a site inspection, and includes a 30-year funding plan.

Meanwhile, a reserve study update with a site visit is the second-most expensive. This study is not as comprehensive as the first because it only updates a previously completed study. This also comes with a new 30-year funding plan. Still, it does involve a site visit, which impacts the HOA reserve study cost.

Finally, the cheapest type of reserve study is simply an update with no site visit.

Given the varying natures of these studies, price points can differ greatly. Companies may also charge different fees depending on their level of service, location, and other factors. In general, though, associations should expect to pay anywhere between $500 and $10,000 for a reserve study.

What is the New Law for Reserve Study in Florida?

Florida’s requirements for HOA reserve studies have grown stricter. After the collapse of Champlain Towers South in 2021, legislators in the Sunshine State enacted more stringent requirements for condo associations.

According to the new law, a structural integrity reserve study for a condo association must be completed by December 31, 2024. A structural integrity reserve study (SIRS) is different from a traditional reserve study in that it focuses more on the physical condition and strength of the building and is more comprehensive in its inspection.

Buildings must complete a milestone inspection by the end of their 30th year after receiving the certificate of occupancy. Meanwhile, buildings within 3 miles of a coastline must complete this milestone inspection by the end of their 25th year. After that, inspections must occur every 10 years for both types of buildings. However, this requirement does not apply to buildings with three stories or less.

In the past, associations could waive reserve funding with a majority vote. However, the new Florida law makes this impossible. Associations can no longer vote to waive funding altogether or only fund a portion of the required amount.

Be Smart with Reserve Studies

An HOA reserve study holds significant value in budget planning and financial stability. However, far too many associations ignore this need. Even if state laws don’t require reserve studies, associations would still be wise to perform one with the help of a professional.
Freedom Community Management provides HOA management services in Florida. Call us at 904-490-8191 or contact us online to learn more!

Understanding the Florida HOA reserve fund laws that govern homeowners associations and condominiums is important. When board members understand these laws, they can ensure compliance and avoid potential liability.

The Purpose of Florida HOA Reserve Fund Laws

To any homeowners association, the reserve fund is a critical component of financial stability. Unfortunately, many HOAs and condominium associations in the country fail to maintain a reserve fund. As such, when major expenditures are needed, associations are left to raise regular fees or levy significant special assessments.

In Florida, there are strict reserve fund laws. Legislators in the Sunshine State passed more stringent requirements for association reserves, particularly for condominiums, in 2022. The Florida Legislature sprang into action following the collapse of the Champlain Towers South condominium in Surfside. The collapse resulted in the deaths of 98 people and injured others.

The collapse of the Champlain Towers could have been prevented. According to investigations, the long-term degradation of the building’s structural support was a significant contributor to the condominium collapse. The problems were noted in 2018 and again in 2021, only much worse. Although the condo association approved a $15 million remedial works program before the tragedy, work had not commenced, and the collapse took place.

The importance of HOA reserve funds is abundantly clear. Associations can quickly liquidate their reserves to pay for major repairs and replacements of their components. An HOA’s reserves can protect the association and its residents when managed and expended properly. Florida’s stricter laws also help steer associations on the right path.

What are Reserve Funds?

A reserve fund consists of funds allocated for future costs. For community associations, these funds are used to pay for major repairs, maintenance, and replacements of common elements in the future. It is essentially a bank account used to store the association’s savings. Given that an HOA should have quick access to the money, it is important to have a highly liquid reserve fund.

Operating Fund vs Reserve Fund

Although there is no difference between reserves and reserve funds, there is a distinction between operating and reserve funds. For an HOA, the reserve fund pays for the cost of major replacements and repairs of common elements in the future. 

For example, if the clubhouse’s roof is set to reach the end of its useful life in 10 years and the cost to replace it is $10,000, an association must set aside $1,000 per year so that it has the money to pay for the replacement when the time comes.

In contrast, an operating fund consists of an association’s money for day-to-day operating expenses. Regular expenditures fall under this umbrella. Common operating expenses for an HOA include office supplies, management fees, insurance premiums, cleaning fees, etc.

An HOA should keep separate accounts for its operating fund and reserve fund. This way, board members can keep track of the money separately, and there is a reduced risk of commingling the funds.

Florida HOA Reserve Requirements

Here is a breakdown of the Florida HOA reserve fund laws that associations must know about.

Accounting Records

According to Section 718.501(1)(c), an association’s accounting records must include structural integrity reserve studies. A condo association must maintain these reserve studies for at least 14 years after completion of the study. Other accounting records include but are not limited to financial reports, accounting statements, reviews, and audits.

Condominium Financial Reporting Rules

According to Section 718.111(13), a condo association must have “standards for presenting a summary of association reserves.” These standards must be included in the association’s financial reporting rules. Additionally, an association should consist of a good faith estimate of the yearly amount of reserve funds that the association will need to fund each line item of the reserves fully. This estimate should use the straight-line accounting method.

According to Section 718.112(f)(2), an association’s annual budget must include reserve allocations for painting, pavement, roof replacement, and other items with a replacement cost of more than $10,000. The reserve amount should follow the association’s most recent reserve study. An association must complete this study by December 21, 2024.

If an item’s reserve amount does not appear in the association’s initial or most recent study, the association must compute the amount using a formula based on the estimated remaining useful life and the estimated cost of replacement or deferred maintenance expense. 

The same applies if the association has yet to complete a reserve study. Every year, the association may adjust the assessments for replacement reserves to consider the changes in useful life or estimates brought on by deferred maintenance.

In the past, associations could waive reserve funding through a majority vote at a duly called meeting. However, beginning December 31, 2024, associations can no longer vote to provide any reserves or less than the requirement.

Frequency of Study

According to the new Florida law, condo associations must complete a structural integrity reserve study by December 31, 2024. Beginning in January 2025, they must use the findings to inform their annual budget.

Buildings must also complete a milestone inspection by the end of the 30th year after receiving the certificate of occupancy. Subsequent inspections must take place every ten years. For buildings within 3 miles of a coastline, the milestone inspection must happen when they reach 25 years old, with subsequent inspections also occurring every 10 years after that.

For Homeowners Associations

According to Section 720.303(6), a homeowners association can prepare a budget that includes reserve funding for capital expenditures and deferred maintenance for the items the HOA is responsible for. If the HOA does not establish reserve accounts, financing these reserves is confined to the extent that the bylaws and CC&Rs restrict dues increases. Associations can waive to fund the reserves, provided there is proper notification in their financial statements.

The Role of Governing Documents

While Florida state laws have strict reserve requirements, every association should also refer to its governing documents. The CC&Rs and bylaws, in particular, may have more stringent requirements and procedures regarding reserve funding.

An Advantage for All HOAs

An association’s reserves play an essential role in safeguarding its assets. Reserve funds allow associations to budget for future expenditures properly without burdening homeowners with substantial, one-time payments. While legislators passed stricter Florida HOA reserve fund laws to avoid another Champlain Towers tragedy, they benefit all associations in the long run.
Freedom Community Management provides HOA management services in Florida. Call us at 904-490-8191 or contact us online to learn more!

Daily bank reconciliation for HOAs can be a tedious process for bookkeepers, accountants, and treasurers. Nonetheless, it can be beneficial for homeowners in many ways. Let’s examine why daily bank reconciliation can be ideal for communities. 

What is Daily Bank Reconciliation for HOAs?

Bank reconciliation is the process of comparing internal account records with bank statements to make sure they align. If records match, it means the bookkeeper and accountant did well when recording daily transactions.

However, mismatched data often means there was a miscalculation or a mistake in the recordation process. The bookkeeper or accountant must find what caused the discrepancy and fix the records to ensure the accounts reflect reality. 

Daily account reconciliation, on the other hand, simply means you do this process daily. The accountant or bookkeeper must compare the day’s records with the bank statement to ensure the ending balances are correct.

Why is Bank Reconciliation Important?

Bank reconciliation is important for many reasons. Here are the biggest reasons why HOAs should always reconcile their bank statements.

1. Correct Mistakes

HOA accountants and bookkeepers are in charge of recording daily transactions and ensuring they are correct. Skilled as these professionals may be, though, it’s not uncommon for them to make a few mistakes here and there. They might have forgotten to record a payment or miscalculated certain transactions.

Unfortunately, mistakes like these can be hard to spot without a reference point. Bank reconciliation allows them to use bank statements as the point of reference to identify discrepancies. Moreover, it helps them track down which transaction might have been responsible for the error.

2. Internal Control

Why is bank reconciliation important in internal control? While discrepancies may point to honest mistakes, they can also uncover suspicious activity committed by one of the staff or board members. In other words, they can reveal potential fraud. 

Sadly, fraud is a common occurrence in homeowners associations. Some board members think it’s their right to misuse funds to “compensate” them for their work—even though they do not usually receive a salary.

Other times, staff members, directors, and HOA managers may have bad intentions and take community funds themselves. They might steal a small portion every month, so it goes unnoticed. This is why even the most minor discrepancies in bank reconciliations should be investigated.

3. Understanding Your Financial Position

The assets of a homeowners association may project a financially healthy community, but assets only tell one part of the story. With bank reconciliation, HOAs can zoom into their liquidity and examine their cash flow. It allows them to make more informed decisions to stay liquid for upcoming expenses.

4. Correcting Bank Errors

It’s uncommon, but banks do make mistakes. The bank might have charged duplicate fees or miscounted a particular deposit. Not noticing the error can be devastating as it could mean hundreds — maybe even thousands — of losses. Bank reconciliation helps you spot these errors and notify the bank.

Bank Reconciliation: The Benefits of Doing it Daily

Most people recommend conducting bank reconciliations at least once a month. However, the truth is that it’s always better to do it as often as possible. What is the purpose of the daily bank reconciliation in HOAs? 

Easier to Correct Mistakes

First of all, it’s much easier to correct mistakes when you reconcile statements daily. The longer you wait, the more transactions you must review and verify. It can get complicated, mainly if the discrepancy traces back to several errors. 

Spot Fraud Early

Fraud often happens when there are few to no checks and balances in the community’s accounts. The person committing fraud might slowly withdraw money from the accounts to evade detection. If bank reconciliation only happens once a month (or worse, every few months), they might have already stolen a large amount. 

While you can catch the fraud after reconciling the bank statements, it’s not easy to get the money back. Homeowners will have to shoulder the consequences of negligence and pay higher fees just to cover the cost. 

More Accurate Reflection of Reality

Daily bank reconciliation for HOAs ensures your records always accurately reflect reality. Homeowners will sometimes review the HOA’s financial records to keep the board accountable. They might make the wrong conclusions if the community’s cash accounts are bloated or underreported. 

For example, a resident might question a recent assessment increase. If the records show the HOA has a lot of cash, they might make a complaint thinking the increase is unreasonable. In reality, the board might have made the decision because the community lacks cash in the bank.

How to Conduct a Bank Reconciliation

How do you conduct daily bank reconciliation for HOAs? Here are a few simple steps to help you cross-examine your records and bank statements.

1. Compile Records

Get all of the relevant records and transaction lists together. This includes your bank records, statements, general ledgers, logbooks, journals, and any other document you might think is necessary.

Most banks provide monthly statements to homeowners associations. However, a lot of banks will also update your account in real time through online banking. Sophisticated accounting software can also connect to certain banks and collect financial information instantly.

2. Review and Cross-Examine Records

The hardest part of bank reconciliation is the review part. Make sure to check each income and expense account in the books to ensure each line item corresponds to the transactions in the bank statement. Deposits and withdrawals should also be accounted for.

3. Make Adjustments

If you find a discrepancy, it’s essential to adjust the bank statements and cash accounts properly. Remember that some discrepancies can be caused by processing delays, such as deposits in transit or outstanding checks. 

4. Check Ending Balances

After making each adjustment, ensure all records’ ending balances match. Otherwise, you might have missed an error and need to go back.

The Board’s Fiduciary Duty

Daily bank reconciliation for HOAs is ideal because it eliminates errors immediately and uncovers fraud before it snowballs. Of course, it’s not always feasible if you don’t have the manpower. Nonetheless, these checks and balances are part of fulfilling the board’s fiduciary responsibilities to the community.

Does your HOA need help with daily bank reconciliation? Freedom Community Management can help. We provide financial and HOA management services to communities in Florida. Call us today at 904-490-8191 or contact us online to find out more!

Bookkeeping and accounting are terms often used interchangeably. However, they are distinct in several ways. Is bookkeeping for HOAs a necessary service? How is it different from accounting and which service is best for your community? Let’s find out. 

What is Bookkeeping for HOAs?

The bookkeeping process for HOAs involves recording and organizing the community’s financial data. It consists of recovering and tracking the association’s financial transactions like bank reconciliations, payroll, billing, and invoicing.

HOA Bookkeeping vs Accounting

Bookkeeping for HOAs is quite similar to accounting. In fact, the terms are often confused, as bookkeeping also involves preparing financial statements, maintaining an HOA chart of accounts, and balancing subsidiaries. 

However, while bookkeeping is mainly concerned with organizing data, accounting is more concerned with presenting and interpreting information. It’s a high-level process that uses the bookkeeper’s data to produce financial models. 

For this reason, accounting involves several additional processes, including the following:

• Analyzing operational costs
• Reviewing and interpreting financial statements
• Completing income tax returns
• Preparing to adjust entries
• Helping the HOA understand the result of certain financial decisions

Accounting is more of a process that helps you make decisions about the data your bookkeeper has compiled. It allows associations to understand better the community’s financial standing, profitability, and trajectory. Moreover, it helps them become more aware of cash flow. These analyses can help HOA boards with strategic tax, forecasting, and financial planning. 

Bookkeeping for HOAs: What Are the Benefits?

Bookkeeping is a necessary part of financial management. After all, you need information to make financial analyses. Here are some reasons why the practice is still required.

1. Maintaining Accurate Financial Records

Typically, the treasurer serves as the bookkeeper for HOA communities. However, while this setup can be convenient for small communities, the treasurer of a large community may need help to handle the workload.

For this reason, many associations avail of professional HOA bookkeeping services to track the neighborhood’s income and expenses. Professional services have the experience and manpower to handle the immense workload. Moreover, there is less confusion when it comes to generating financial statements.

2. Spotting Financial Errors Early

Whether you need bookkeeping for small HOAs or significant associations, professional bookkeeping services will help you monitor your finances regularly. Doing so can reduce the risk of financial errors if you manage your books less frequently.

Bookkeepers can immediately spot minor issues like double charges, questionable invoices, and suspicious financial activity. Missing these minor issues could result in major financial losses for the community.

3. Easy HOA Audit

Many associations need to prepare HOA-audited financial statements as required by state law or the governing documents. Regular bookkeeping can make the process faster as all the financial records will be easily accessible. No need to scour through all the receipts and invoices dating months back!

4. Monetary Savings

Professional bookkeeping services seem expensive now but will save you money in the long term. Regular bookkeeping prevents you from making financial mistakes due to delayed recording and organization.

In addition, tracking records daily allows you to keep tabs on accounts payable. This prevents you from incurring unnecessary interest and late fees. Plus, a dedicated bookkeeper can also save money for the residents. The bookkeeper can send timely invoices so residents can make monthly payments without delay. 

5. Access to Accounting Tools

Professional bookkeepers can access industry tools that make financial management more effortless. Often, they already have the necessary tools, so you don’t have to worry about researching the best software. 

6. Financial Transparency

Bookkeeping allows the HOA to maintain financial transparency with the rest of the community. By recording transactions regularly, the HOA can itemize each transaction and showcase how money is spent and collected. Community members can inspect these records to verify, with their own eyes, how the community spends its funds. 

7. Legal Compliance

Homeowners associations are subject to several laws that require financial transparency. Proper bookkeeping helps the community maintain accurate records and ensure compliance with state laws and governing documents.

8. Accurate Budget Creation

Information is vital to creating an annual budget. With a detailed record of the association’s financial history, the HOA budget committee can easily forecast the coming year’s expected expenditures and income. 

In addition, effective bookkeeping can help the community track the actual income and expenses as they happen. The board can quickly adjust the budget — whether it’s by increasing revenue sources, managing cash flow, or reducing expenses — to ensure the community’s financial stability. 

9. Financial Stability

Financial stability starts with maintaining accurate records and financial reporting. Incorrect records can be devastating, as they can mislead the board into thinking the HOA has enough funds when it does not. The board might make unsound financial decisions that could cost the community a lot of money.

10. Tax Preparation

Homeowners associations are subject to taxes like other corporations. Proper bookkeeping ensures that each financial transaction is properly categorized and recorded, helping the HOA avoid filing errors. 

Does Every HOA Require a Bookkeeper and Accountant?

Depending on the HOA’s financial needs and size, homeowners associations may need only one person to fulfill the roles of bookkeeper and accountant. However, if the association’s operations are too complex, multiple people may need to fill either role.

For example, some homeowners associations have hundreds of units. These associations typically have more sophisticated collection systems and hire more vendors. It’s not uncommon for them to have hundreds of transactions each day.

Even if the HOA is not particularly large, it’s nearly impossible for a single person to handle complex financial needs such as managing significant investments and multiple income streams. 

Starting with a bookkeeping service may be wise to ensure basic financial tasks are managed appropriately. As the association grows — or when it has enough funds — it would be ideal to hire both for comprehensive financial management.

The Bottom Line

Bookkeeping for HOAs may initially seem unnecessary, but it’s important for organizing the association’s financial data and promoting transparency. If possible, consider allotting a budget for a designated bookkeeper. 

Freedom Community Management helps communities all across Florida with financial management and accounting. Call us today at 904-490-8191 or contact us online to learn more!

HOA accounting is one of the most challenging parts of community management. It’s easy to make a mistake, especially if the management team and accountant are inexperienced when it comes to accounting for homeowners associations. However, most of the challenges can be overcome and mistakes can be avoided with good practices. 

HOA Accounting and Financial Management Challenges

Most HOA financial management and accounting challenges can be circumvented. It takes ample preparation, good financial practices, and a team of seasoned professionals. What are the challenges to watch out for regarding your HOA accounting method and financial management practices? Here are some common examples.

1. Collection Management

HOA fees are the main source of income for most homeowners associations. These funds keep the community alive by paying for maintenance, supplies, and reserve funds. They keep the community from falling apart and ensure it remains a good place to live.

However, unpaid dues and multiple late fees can imbalance the association’s finances. Without timely collections, the HOA won’t have enough funds for management and upkeep. Create a schedule homeowners can follow to stay on top of monthly collections.

In addition, it may be wise to hire a collection agency or attorney to help the community manage delinquencies. HOAs should give grace to homeowners who have trouble keeping up with the expense. Nonetheless, it cannot be too lenient as it can lead to significant losses for the HOA. Everyone else will have to shoulder the cost of unpaid dues. 

If possible, HOAs can use technology to speed up the process. Offering an online payment platform makes the process more convenient for both the homeowners and the HOA board. Plus, an online platform can be connected to several payment methods, such as ACHs, eChecks, and credit cards. 

2. Bank Reconciliation

The HOA’s accountant might record the community’s financial activity in the books, but the records should align with the association’s bank accounts. A discrepancy could mean mismanaged funds, unrecorded transactions, or even fraud. 

Unfortunately, bank reconciliation can be difficult for homeowners associations without prior experience. Most communities use Excel sheets to reconcile accounts, but this is not always a practical solution for large associations with hundreds of monthly transactions.

HOAs can mitigate potential problems with bank reconciliation by using technology. Reliable HOA management software has comprehensive accounting features that can handle bank reconciliation. If you have room in the budget, consider purchasing one for the community.

Alternatively, some HOA management companies offer bank reconciliation as part of their homeowners association accounting services. Many also have comprehensive accounting software, eliminating the need for your community to purchase your own. 

3. Duplicate Bills

Duplicate bills and payments are surprisingly common. Some vendors send invoices more than once to follow up on an unpaid bill. Other times, they simply need to remember they have already billed the HOA. It’s easy to make a mistake when this happens, as HOA financial managers might not constantly check and pay the bill twice.

Fortunately, HOAs can mitigate the risk of duplicate payments by utilizing HOA management software. These tools simplify the process and reduce the possibility of human errors. Alternatively, HOAs can delegate the task to a reliable HOA management company that can process payments more thoroughly. 

4. Compliance With State Law

Homeowners associations must be familiar with state laws to remain compliant while doing accounting. However, most board members need help memorizing every single piece of legislation that affects HOA accounting.

Hiring a professional HOA accountant familiar with local laws related to HOAs and financial management is essential. They can help the community remain compliant and use the correct formats when preparing HOA financial statements. 

5. Filing IRS Forms

It may seem surprising to some but homeowners associations do pay taxes. If they do not qualify for exemptions, they need to file their year-end tax forms with the IRS just like other organizations. 

Unfortunately, taxes are particularly confusing for homeowners associations. They’re also time-consuming and complex so it’s easy to make a mistake. This could lead to devastating consequences as failing to pay the right taxes or missing a deadline could mean penalties.

A good solution would be to utilize automation to eliminate human errors. HOA software can streamline the process and automatically generate forms and supporting documents. Plus, they’re more accurate and guarantee homeowner transparency.

If you need a little extra help, a dedicated accountant and financial manager with experience in HOA tax filing can also be beneficial. You can also ask an HOA management company to take care of the tax for you. 

6. Potential Fraud

Just like other organizations, homeowners associations are subject to fraud. The best way to avoid this is to adopt internal controls when it comes to accounting, fund management, and HOA financial reporting. 

Make sure that no single person has complete control over HOA finances. The person who writes the HOA’s checks should not be the same person who manages collections or invoices. Moreover, payments should all be made directly to the HOA’s bank account instead of an association officer. 

In addition, we recommend assigning one person to review all deposits, invoices, and bank statements. An audit every few years is also a good idea to find any cracks in the HOA’s finances. The board must protect the community and ensure its funds are properly utilized.

7. Budgeting

The budget can make or break an association’s finances. A well-made budget can make all the difference between being in debt or having leftover funds for rainy days. Thus, each association should pay attention to the budgeting process and prepare the following year’s budget months in advance.

Consider forming a dedicated budget committee to assess the community’s financial status. They can survey vendors, research rate increases, and forecast potential expenses to create a realistic budget for the coming fiscal year. 

Hire a Professional

HOA accounting and financial management are some of the most difficult parts of community governance. Without the right background or expertise, you may end up in the red and put the community in financial trouble. If nothing else, make sure to pay special attention to financial management. 

Homeowners associations often need help with HOA accounting and financial management. That’s where Freedom Community Management can come in. We offer expert financial management and accounting services to associations across Florida. Call us now at 904-490-8191 or contact us online for professional HOA financial services in Florida!