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Is Your HOA Prepared For Surprise Expenditures?

Posted by IKO Community Management on May 3, 2018 at 9:00 AM

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According to CBS News’ MoneyWatch, a Bankrate survey in 2017 stated that a $500 surprise expense would put 57 percent of Americans in debt.

“It’s not a matter of if, but when an unexpected expense will pop up,” Jill Cornfield, a Bankrate analyst, said in a statement to MoneyWatch.

Most Americans said they have enough savings to cover the expense, while others said they’d put it on a credit card, cut back on everyday expenses, or ask family or friends for money. How would your HOA community handle a surprise expenditure?

IKO Community Management of Olney, Maryland, talks about the ins and outs of financial management for surprises in your neighborhood and how your homeowners association can handle the stressful situation:

What qualifies as a surprise expenditure?

A surprise expenditure is anything that your community is unprepared to pay for. While the HOA budget may be in order, with properly allocated operating and expense accounts, surprise expenditures can put a huge dent in your financial management.

Examples of surprise expenditures include the following:

  • Major common area expenses, including siding, roof, or porch replacement; air conditioning or furnace repairs; plumbing emergencies; or an electrical panel upgrade
  • A robbery, which causes for locks on common area buildings to be changed, windows replaced, and other cautionary measures
  • A sudden increase in property taxes
  • Damage from an insect infestation
  • Community pool equipment breakdowns or refurbishing
  • Parking lot or sidewalk resurfacing after a natural disaster or poor weather
  • Costs of growth, including excess office supplies or training
  • Unexpected opportunities, including a new piece of HVAC equipment that increases energy efficiency

How can you prepare your budget for this expense?

Solid financial management is critical in this case. However, the best way to prepare for these expenditures is to anticipate and ask questions. Start with the following cautionary questions:

  • How old is the equipment for the community pool?
  • Do any third-party contractors offer seasonal or loyalty deals?
  • What did the heating and/or plumbing maintenance check-up detail?
  • What’s our anticipated community growth in the next year?
  • Does any part of the neighborhood need extra attention?
  • Do we need to hire more lifeguards and/or pool managers for the summer?

Strategically looking ahead at potential expenses is the best way to anticipate and prepare for surprises. Ty Kiisel, a contributing author that focuses on small business financing at OnDeck, a technology company that solves small business capital problems, said to GoDaddy, “Plan for the best, but prepare for the worst.”

How should you pay for a surprise expenditure?

Raising the HOA fees, being petty about HOA fines, and imposing special assessments isn’t the solution to covering a surprise expenditure. It seems like a good short-term solution, but it disturbs community harmony and trust between the residents and homeowners association. Don’t rely on borrowing to solve this financial problem.

Instead, look at the reserve account of the homeowners association. If you have enough money to cover the surprise expense, pay for it in full and work on rebuilding the reserve account. Using the community reserve fund to cover costly or surprising expenses is a good place to start.

If you don’t have enough money in the reserve account, conduct a reserve study and talk with other board members about how to address this payment.

According to an All Property Management blog in 2017, 70 percent of HOA budgets are undercapitalized. This means surprise expenditures fall on homeowners and lead to poor financial management decisions.

For more information on fiduciary responsibilities of board members and how to handle a budget, click on the button below to download IKO Community Management’s Guide To Financial Management:

Download The HOA Guide To Financial Management

Topics: HOA Board