Avoiding Financial Frustration: How to Prevent Common HOAs Mistakes
December 19, 2022
Community management companies and their local community boards are known for working together to create exceptional residential experiences. From maintaining landscaping and amenities to ensuring critical repairs and undertaking capital projects, there is a significant onus on them to not only ensure that resident assessments are well managed, but also in ensuring the HOA is ready to weather any storm.
An HOA’s finances provide a snapshot into its health, its ability to rise and meet challenges, and ultimately function to its full – and often legal – potential. Unfortunately, there are instances where the financial health of the HOA can be at-risk or compromised. Among the most common best practices to avoid financial frustrations are:
1. Adequate Bookkeeping
Keeping an accurate record of financial transactions is a critical component of successfully managing a healthy HOA. Not only does it help leadership keep an eye on cash flow, but it also determines where the money is being spent. Accurate bookkeeping also prevents against fraudulent activity among individuals who may have access to the HOA’s funds. Similarly, HOA managers compare what they budgeted for expenses with actual expenses, which will allow a better understanding of the impact on the association’s bottom line. In the same vein, identifying potential issues with homeowners defaulting on payments and working with those homeowners will help prevent a shortage of operating funds.
2. Budgeting Realistically
Repairs can be expensive, especially as costs increase across the board. Realistic budgeting that takes into consideration price increases in labor, equipment and other resources is critical to ensuring that anticipated expenses can be covered with the cash an HOA has on hand, or can anticipate borrowing, to make improvements to the community. Inaccurate budgeting, which most often occurs by simply copying past years’ budgets without looking into increases, can lead the way to a shortage of funds, special assessments and other charges that are passed on to residents. Good practices include cushioning projected expenses by 3-5% to ensure any unexpected hiccups along the way can be handled. It’s also a good idea to itemize expenses. This will allow managers to identify exactly where money has been spent.
3. Conduct a Professional Reserve Study
Like financial reports that analyze the current state of the association, the reserve fund is an important tool to offset major repairs or maintenance in the future, or to cover unanticipated expenses. Similar to the operating fund, the cash in the reserve fund comes directly from member assessments. It’s vital for HOA management to conduct a reserve study to take stock of the condition of its community and anticipate the cost and timing of a potential repair or replacement. The study will also take a critical look at the HOA’s revenue, expenses, and reserve fund balance, which gives HOA leaders the chance to make adjustments as needed. Otherwise, an underfunded reserve fund can obstruct major needed improvements to the property and can result in higher or special assessments to allow work to move forward. A flush reserve fund can also provide HOAs with the leverage needed to secure a low interest rate loan that can be paid back over time.
4. Refrain From Cutting Corners to Cut Costs
As prices increase and labor rates spiral, cutting costs is at the top of everyone’s list – HOAs aren’t exempt. However, while it may seem like taking the least expensive bid is the most sensible budget-conscious decision, it can sometimes result in undertaking a more costly endeavor. Unqualified vendors, lower-grade materials and rushed timelines can spell disaster for the bottom line as repairs or replacements may need to be undertaken again in months versus years. In everything it does, an HOA’s role is to maintain the community and protect and enhance members’ property value.
5. Have a Team of Experts
Sometimes, HOAs rely on the skills of board members, volunteers, and others to help with important functions from accounting and legal to community management and more. Unfortunately, a lot can slip through the cracks without hiring dedicated resources to help with the heavy lifting. While it may be less expensive to tap into willing volunteers, being equipped with a team of professionals from the legal, financial and community management areas allows them to be laser-focused on the best possible outcomes for the HOA. An attorney with HOA experience can speak knowledgeably and offer important counsel when dealing with challenging situations. At Alliance Association Bank, our clients have seen the difference in the unique approaches, tools and resources that can come from a financial institution with intimate knowledge of how HOAs operate and an understanding of their associated obligations.
6. Provide Board Member Education-Roles and Responsibilities
Having a board of directors is a crucial component for the oversight of the HOA. However, many times, board members do not have a clear understanding, and associated wherewithal, to operate successfully as part of the body. Arming and educating each board member with the background and expectations of the HOA will help them better understand their roles and responsibilities as board members, and how best to fulfill them. A board’s governing documents typically lay out who can and cannot serve on the board, as well as the qualifications of each individual who serves.
An HOA is tasked with making big decisions for the health (and wealth) of its community. Understanding where common pitfalls lay can help them avoid costly mistakes and frustrations. To learn more about how Alliance Association Bank can work with your association to provide financial options to help put your HOA on firmer footing, contact one of our community association banking experts in your region.