Avoiding Unwelcome HOA Financial Surprises
As we prepare thousands of HOA, individual, and business tax returns while helping clients avoid tax surprises, we also want to help community association property managers and board members avoid common budget and financial surprises.
Here are 10 potential surprises, and how to avoid or address them:
- Unbudgeted expenses. Did you just agree to a big community party, but there’s no social budget? I bet your association budget is already tight, leaving no room for extra spending. If something comes up, add it to the budget while pulling money from another budget category. Maybe fewer flowers in the spring…
- No (or low) operating cash. There is a general tendency to spend budget money as quickly as possible in the year, although dues and assessments are often paid throughout the year. Do a little advanced planning and spread out expenditures, especially major purchases
- Uninsured or underinsured. We found in my HOA that our initial liability policy didn’t cover the amenities, and only covered 50% of the neighborhood homes. Learn a lesson from us, and maintain adequate D&O (Directors & Officers) insurance, theft insurance, and cyber insurance. Limited D&O coverage can make the board members personally liable, and lack of other coverage can literally wipe out a community’s bank account.
- Not enough money in the budget. As a general rule, expenses go up each year but revenue is fixed. At some point the community will need more money. Many boards slash budgets (programs, amenities, maintenance, etc.) until it’s just not feasible to operate the community. Take the hit and increase dues – even if it’s just a small amount each year.
- Underfunded reserves. This is one of the main issues we uncover during audits and audit-like engagements. The reserve account is the long-term savings account for the community. You need a professional reserve study to determine savings required to cover major future repairs and replacements, like the tennis courts, pool surfaces, or building roofs. Then, allocate appropriate reserve funding as the first step in the budget process.
- Conflicts of interest. Be transparent, even if there is just a hint or perception of a conflict. Your brother’s painting company may be the best alternative, but there’s at least a perceived conflict here that should be proactively addressed. Document the potential issue, and share with the property manager, board, and community as needed.
- Resigning board members. This is worth addressing at elections, but also throughout the year. Avoid electing board members who have a single cause, like building a bocce court. Once that cause is complete, or shot down, you may lose the board member. Make sure your board is sharing the workload over the course of the year. Property managers, you can really help out here!
- Resident dissenters. Someone will always be upset with a property manager and board decisions – it’s a sure bet. You can minimize the amount and impact of these negative neighbors by communicating, early and often. Share the reasons behind major decisions, and hold town hall meetings if needed. Publish monthly financial updates, so everyone can see the community’s financial health.
- Resident lawsuits. Not only are lawsuits expensive, but they can kill community morale and potentially cause major hassles (professional and personal) for community leaders. Follow the covenants, bylaws and other governing documents. Remember your fiduciary duty (see next bullet) to the community as a board member or property manager.
- Forgetting your fiduciary duty. This is one of the deadly sins of HOA leadership. As a property manager or board member, you must put the community needs before your own. You’re responsible for the financial health of the community. It’s a real business with thousands or even millions of dollars of revenue. Please take your role seriously!
- Cutting (or not annually increasing) the maintenance budget. As communities age, maintenance becomes more expensive. There are more projects, more major repairs, and more big-ticket item replacements. The magic number for “aging community” status seems to be about 15 years. Build this into your annual budget. If you can’t, increase the dues!
With some ongoing attention, professional advice, and open communication, you’ll minimize your chance of surprises. Please contact me if you have any questions about these surprises, or the general financial health of your community.
Neal Bach, CPA