Setting an HOA budget is one of the most important tasks HOAs have to do annually.
By implementing some HOA budget best practices to set a balanced budget for your HOA, it should cover all necessary expenses (including unplanned ones).
This helps you determine what annual HOA fees to charge and ensures you don’t have to charge homeowners extra fees called special assessments throughout the year, which can make your HOA board very unpopular.
Set up an HOA budget meeting with the board
The HOA board is the group of people tasked with running the homeowner association. Typically, the board consists of four main roles: president, vice president, board secretary, and HOA treasurer.
Although the HOA board treasurer is the primary person in charge of dealing with the HOA budget, it’s the responsibility of everyone on the board to work together to keep the budget balanced.
As such, the first thing you need to do when setting a new budget is to schedule an HOA budget meeting with the board.
The best time to do this is in the late spring or early summer. That way, you have plenty of time to plan and you don’t leave setting next year’s budget until the last minute. Expect the meeting to take a full afternoon.
Listen to your community
In order to correctly set your HOA budget, it’s important to understand exactly what your HOA board is responsible for, including what your community guidelines state and what community members expect the board to take care of.
Refer to your HOA community’s governing documents to review all guidelines for preparing and distributing the budget. Also, make sure to read through what services and maintenance the board is responsible for providing to take those into account for your new budget.
Pro tip: type out a summary of your community guidelines as they relate to the budget (a cheat sheet) and print it out for all the board members in advance of your HOA budget meeting.
In addition to reviewing community governing documents, you should also talk to homeowners and ask them what projects or repairs they suggest. You can do this easily by sending out a survey to all homeowners in your community.
Discuss suggestions with the board and factor any that seem popular or necessary into the budget as well.
Learn from the past and prepare for the future
One of the most important HOA budget best practices is to look at your HOA’s annual budget reports from the past three years and compare planned expenses to actual expenses.
Look at areas where your HOA spent less or more than you budgeted for, and adjust your new budget accordingly in those areas.
You should also expect your budget needs to increase every year because of inflation. You can get an idea of how much of an increase is needed by looking at how much more your HOA spent year-over-year for the last three years.
Additionally, make sure to do your due diligence by confirming the costs of all contracts and services for the upcoming year.
Contact contractors you employ, such as landscapers and maintenance people, and other service companies you pay, including your HOA insurance provider, and confirm prices for the new year to make sure you get the budget right.
Plan for the unexpected
There are always unexpected additional expenses in life, so make sure you have an HOA reserve fund to cover anything unplanned that pops up in the coming year. These might include unforeseen repairs or large projects that go over budget.
A good rule of thumb is to put at least 20% of HOA fees into your reserve fund every year to cover these types of additional expenses, so you don’t have to charge special assessments to homeowners in your association. Larger HOAs may want to put more into reserve (anywhere from 25-40% of fees).
Ideally, each year’s spending should fall under the budget you set, so this reserve continues to grow over the years.
HOA budget example:
A typical example of an HOA annual budget plan is divided into three main categories:
- Operating costs/fixed costs
- Administrative expenses
- Reserve funding
Operating costs/fixed costs
Operating costs include everything that it takes to run your HOA community, including common area maintenance, utilities (water/electricity), trash removal, landscaping, cleaning, and repairs/replacements. Other fixed costs include things like property taxes, income taxes, and HOA insurance policies.
Funding for special projects and/or special events would also fall into the operating expenses category of your HOA budget. For example, if the board has decided to build a community pool next year, you would include the budget for that in this section.
Administrative expenses include things like HOA website hosting and maintenance, accounting and legal fees, bank fees, office expenses, and other things that are needed to run the administrative side of your HOA.
Your HOA reserve funding is the percentage of fees that you decide to put into your reserve each year. Once you determine your operating/fixed costs and administrative expenses, add the reserve fund percentage you decided on to those to get your total budget.
After you have your total budget, you simply have to divide it by the number of paying HOA members to determine the annual dues for each homeowner.
HOA budgeting can be stressful, but as long as you get a head start on it and follow HOA budget best practices, it doesn’t have to be difficult.
Make sure to prioritize things like maintenance and repairs, insurance, and other essential operating expenses to avoid underfunding, and then you can set a reasonable budget for extras like special projects and events.