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!
