Posted by IKO Community Management on November 17, 2016 at 8:45 AM
Whether the homeowners association is brand new, or your treasurer is an old hat at accounting, creating a well-thought-out budget for your community is one of the most important processes because it affects every homeowner. To make sure that you have calculated and accounted for everything correctly, here is IKO Community Management’s step-by-step guide on how to make an HOA budget:
- Create a business plan for the community. This should be a monthly list of goals that the community wants to accomplish over the next year.
- Prepare and send out Requests for Proposals (RFPs) for next year’s recurring contract services. This should include lawn and landscaping, pool management, snow removal, trash and recycling removal, insurance policies, annual audit and tax preparation, and any other recurring contract. This allows treasurers to budget more accurately with hard numbers instead of estimated expenses.
Tip: Ask if any vendors plan on raising rates, or if the contract has a clause for annual increases. If the contract is up for renewal, request bids from other companies to lower or maintain costs.
- Assess the maintenance needs for the community. Look at reports for expenses spent on maintenance, repairs, and monthly utilities so far. Then, assess the condition of the neighborhood and take into account for what the community’s goals are for the next year. You will be able to see how the goals align with the needs of the community.
- Look at reserve fund contributions. The neighborhood’s reserve fund analysis should be updated every 2 to 3 years to determine if the homeowners association is contributing enough for the next big project, like repaving the parking lot, replacing playground equipment, or re-insulating the community center. This will help determine if the HOA needs to raise monthly dues to cover the expenses.
According to the TOPS CAM blog, “the reserve fund contribution is part of the assessment levels paid by the homeowners, so this has to be taken into consideration before the assessment levels can be determined for the next year.”
- Enter the known numbers into an Excel spreadsheet, or use an online budgeting tool. This should include the signed RFPs and the estimated monthly utility, maintenance, and repair costs.
- Account for income. Consider the Late Fee Income and any other reliable source of income for the HOA. This will factor into the total amount that is needed to be covered by homeowners’ assessments. TOPS CAM blog said that most community associations use zero-based budgeting. Because of this, it's wise to not rely on previous leftover money from banks unless it is grossly over.
Tip: Budget for hidden expenses, like an insurance deductible charged per building.
- Create a budget comparison to make it easier to explain to homeowners and the other board members. Compare the proposed budget to last year’s budget with the annualized income/expense projection from the current year. You should also bring the best bids from the Request for Proposal process.
- Calculate the appropriate monthly dues for homeowners. Now that you have done all of the legwork, calculate how much per monthly homeowners should pay in order to meet the goals of the community.
A well-developed budget drives community success, which is a byproduct of good HOA practices. Begin with a plan and a few goals, then move to how the community will achieve those goals in the upcoming year. Run the hard numbers, and adjust the HOA dues as you see appropriate.
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From all of us at IKO, happy budgeting!
Topics: HOA Board