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How to Make a Better Budget

The single most important thing the Board of Directors of an HOA or Condo can do is build a good budget. That’s not hyperbole. The budget is central to everything that happens throughout the year for your community association. A good budget means your community is properly maintained, your property values are kept up and

Want to Make a Difference as a HOA or Condo Board Member? Make a Better Budget

The single most important thing the Board of Directors of an HOA or Condo can do is build a good budget. That’s not hyperbole. The budget is central to everything that happens throughout the year for your community association. A good budget means your community is properly maintained, your property values are kept up and it helps minimize unexpected expenses that lead to unpopular actions like assessment fee increases and special assessments. 

The budget is the board’s responsibility

As a member of the board, you are responsible for your association’s budget. Your management company or accountant can help you build it, but at the end of the day, you are accountable for it. This is called your Fiduciary Duty

Why the budget matters so much

Unlike the budget in a for-profit organization, the budget for an association MUST be accurate. That’s because most associations only have one real income source – the assessments. Without the budget, the community cannot operate, bills cannot be paid and the association cannot be maintained. And assessments can’t grow like they would in a for-profit organization. You only have so many houses in the community, and unless the development is planned in phases, there aren’t going to be any more. That means the burden of paying for the community’s expenses falls almost solely onto the shoulders of the people who own homes within that community.

How to calculate a community association budget

(a quick guide on how to calculate assessments)

Because they will have a fixed income to work with, the board of directors have to estimate in advance what the community’s expenses will be. It’s important to know what recurring or fixed expenses the community will have (for example trash and insurance premium payments), what expenses need to be set aside to replace things that might break down, and what other projects or initiatives you will be doing to maintain property values. When you add it all up, the result is the annual income needed for the association.

Once you understand the expenses you’ll have for the year.  you’ll know how much annual income needs to be collected to cover expenses and maintain the community. Divide that by the number of homes in the community to get the annual assessments amount for the year, and then finally, divide that by 12 to get the monthly contribution for each home (that is the simple version btw, there are more complex formulas based on percent of ownership, square footage, amenities, etc. but that is the gist of it.) [There is a very handy calculator here that you can use to figure those calculations]

Why so many community budgets fail

(aka the lazy way to budget )

A lot of board members focus on the amount of the assessments, and on keeping them low. That is the wrong way to budget! Failure to account for all of the factors that go into a budget leads to poor decisions like “stealing” money from reserves to pay for operating expenses, deferred maintenance, high interest loans, and special assessments. You are doing your community (and yourself as a member of that community) a major disservice. 

In a lazy budget, the board might start with the expenses from the previous year, slap on some small increase for inflation, add in the reserve contribution from prior years, divide by the number of units, and call it a budget. Some boards even try to ‘guestimate’ how much it would cost to replace these components and when they are likely to break down. But if this guess is even a little off, it can have big consequences for the board, leading to cash flow problems and special assessments, billing the cost of the replacements directly to the homeowners.

Tips for Creating a Better Budget 

It is important the board understands the association’s current spending and expenses, as well as maintenance responsibilities. For example, if the association is responsible for all the sidewalks and driveways in the neighborhood, you’d need to ensure the community has proper funding to be able to maintain them. This is all done through the budget! Properly done, a good plan can help minimize the need for special assessments, loans and any unwanted or unexpected expenses that arise when you do not have a proper plan in place. 

One way the board can ensure you understand the expenses associated with maintaining the property and develop a good budget plan is through commissioning a professional reserve study. 

A reserve study provides an itemized list of all the common area components in the community from the obvious like the roof and parking lot, to the not so obvious like the HVAC system and plumbing pipes, along with a professional estimate of how long they are likely to last, and how much they are likely to cost to replace.

The board, through the creation of the annual budget is responsible for all of the community’s components from maintaining them to ensuring that the community has enough money available to replace them when they reach the end of their usable life. Knowing the costs to replace common area components in advance ensures the budget is accurate. 

How to get started

(building a plan takes time, so start yesterday)

Because the budget is at the center of the association’s success, it is important to start planning early. It’s recommended the board begin discussing a plan for the upcoming year’s budget as early as September of the previous year. This will give the board time to review their current financials from your management company to understand your spending spending, review the reserve study,  and create a priority list for upcoming projects ahead of time. 

Feeling behind already? Don’t worry! The Morris Management Team is here to help. As an Accredited Local Management Company with over 20 years of experience in the Puget Sound area, we have extensive experience in helping boards succeed. We can help you analyze your reserve study and financial data to craft a long-term plan and build a great budget you can trust to protect the community and property values. 

Request a proposal now to get the ball rolling, and get our professional team on your budget for next year.

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