April 15, 2022

How to Plan the HOA Budget: HOA Budget Template

Are you planning to prepare your HOA budget? Wondering how to do it right?

HOA budget planning is one of the main duties of each HOA board. Without a proper budget, an HOA is like an abandoned ship in the ocean, sans compass. 

Ironically, preparing the HOA budget is also one of the most challenging tasks for HOA board members. Especially if you are trying to do this completely on your own, without professional help. And even though we recommend professional assistance in this matter, the budget committee should know what goes into preparing an HOA budget, its purpose, and best practices. 

So in this post, we will cover how to prepare a budget in detail along with a real-life HOA budget template to get you started. 

But before we move on to that, it is good to understand the importance of the budget itself. 

What is the Purpose of an HOA Budget?

The HOA budget is its navigation device to be able to make the right financial decision, enabling an HOA to meet its overall goals. 

Let’s break it down. 

  • Every HOA needs money for monthly expenses it typically incurs, like maintenance, utility, insurance, management fees, operating expenses for the board, etc. These expenses must be fairly projected so the board can carry out the activities as required. They comprise an important part of the budget. 
  • No HOA can do without estimating the funds required for contingencies in a given year. Most importantly, a reserve fund also is part of an HOA’s long-term planning as opposed to an operating fund. Without an HOA budget, the board wouldn't know what resources to allocate to the reserve fund. 
  • Once the board allocates the budget for expenses, it has an idea about how much to charge the house-owners as HOA fees. Without the HOA fee, no HOA can carry out its routine and planned activities. 
  • Every HOA needs to comply with the state laws and different states may have different laws regarding the HOA budgets. For example, California state law requires that the HOA adopt an operating budget every year. Similarly, every HOA should prepare a budget in compliance with state law. 

Now that we have established the fundamental needs for an HOA budget, let us move to the specifics of how to prepare one. 

Let’s dive in!

How do you Prepare a Homeowner Association Budget?

#1. Start on time

The process of creating a budget is not a hurried job. You should ideally start at least 6 months before the year-end. 

It takes time to gather the necessary documents and information regarding revenue and expenses, like recent financial statements, utility cost increases, etc. The collection itself can take 1-2 months. 

After you have collected the material, you start drafting the budget spreadsheet in the third month. Now, the first draft is not going to be the final one and there will be revisions and fine-tuning. You may have to procure additional information, etc, and then the final accounting review. Give the whole thing three months. 

The sixth month is for complying with any budget-related state laws that exist. For example, California requires the HOA to distribute the budget to the membership 30-90 days before the end of the fiscal year.

#2. Make an HOA budget committee

Yearly budget preparation needs a dedicated group of people to take care of it. Chances are that you already have a budget committee in place. If not, this is the time to get one together. 

The budget committee should ideally comprise a team of people with financial expertise, headed by the board treasurer. The members can come from either the board or from among the homeowners also. The main thing is that they should have the financial know-how. 

The head of the committee should make sure the committee meets the timelines and the work goes on in an organized way. He should have the whole picture of the work as it goes on. 

The budget committee may also decide to outsource accounting services, or management services to either consult or take over part of the process. 

#3. Schedule dedicated HOA budget meetings

HOA annual budgets may be a one-time event, but they need regular coordination and exchange of information between the participants. 

The key point is, that these budget or finance committees should avoid meeting in private. They should duly schedule proper budget meetings and keep the board and the members of the community informed of such.

In fact, in some states, this is a legal requirement. For example, Florida Statutes section 718.112 provides that “meetings of a committee . . . [to] make recommendations to the board regarding the association budget are subject to this paragraph.” 

This means that budget committee meetings must be open to the membership post at least 48 hours prior to the meeting. It also implies that such meetings must keep minutes.

#4. Take a look at previous budgets if possible

Unless you are a brand new HOA, the previous year’s budget is a very useful tool in the whole budgeting process. By carefully comparing past projections to actual expenses, you can plug any miscalculations that may have happened in the past.

For example, if there has been a trend in your HOA to charge special assessment fees, it means that the reserve fund is depleted or not accounted for appropriately. 

Also, if your HOA has been doing a good job with the budget, you can save time and money by simply putting new numbers into an old but efficient format. While putting in new requirements of course. 

#5. Set clear goals

The most important thing is to set achievable short-term and long-term goals for your HOA. Without proper goal setting, or by setting goals that are unachievable, you will be setting yourself and the whole community for disappointment. 

So here are some main goals a home owner’s association may have.

Streamlining and modernizing operations

Running an HOA is not a small feat. From setting and enforcing CC&R violations, overseeing contractors, and various projects happening in the community to communicating with residents, everyone has their hands full. 

In the new year, you might decide to stop doing all these by hand and allow HOA software packages to automate various tasks, saving you time and resources. 

Prioritizing maintenance

Repairs and maintenance may be the most obvious but surely one of the most important goals of an HOA. 

Homeowners pay HOA dues to live in a well-maintained space with facilities. And so unrepaired spaces and poorly maintained facilities like common areas, pools, park spaces, walking paths, etc., may cost your HOA reputation highly. 

Landscaping costs

There’s no question that beautiful landscaping can add to an HOA community’s curb appeal and even real estate value. The opposite is true too. Poor landscaping can bring the value down and avoid people to buy homes in the community.

It is very important therefore to keep the budget aside for maintaining or even adding to your HOA landscape.

However, maintaining a good landscape while keeping things cheap can become a challenge. A good landscaping organization can help you remain within the budget and still maintain a great landscape.

Homeowner defaults

An HOA needs to budget for any delinquent HOA dues, as there are bound to be some. Some homeowners may end up not paying and in case you have not budgeted for such a scenario, it will affect the functioning of your HOA.

You may consider budgeting in some amount for bad debt, so you can offset such delinquencies to a certain percentage.   

Insurance 

Just like the HOA can sue homeowners over selected disputes, homeowners may also decide to sue the HOA. The lawsuits can be for physical injuries, the way the HOA publicizes the board elections, how regularly it maintains the common areas, etc.

So, make sure to budget in HOA insurance costs and re-assess the best insurance company every year to keep it optimized. 

Vendor Optimization

Any HOA association will have a number of vendors providing services at a given point. These may include maintenance crew, lawn care professionals, HOA managers, etc. 

You need to budget for each of these services and at the same time re-assess and optimize their cost each year. 

#6. Maintain a reserve fund

Operating budgets, like the one we are discussing, take care of the operating expenses each year. 

However, large projects like roof replacements or parking lot remodeling need extra or even immediate funding. In such scenarios, the HOA may need to charge additional special assessment fees. These assessments can cost from several hundred to several thousand dollars.

If an HOA board keeps charging extra fees from residents as special assessments, it increases the members’ financial burden and gives the board a bad name. 

So it is important for an HOA to have a reserve budget to maintain a reserve fund for such projects. This may even call for a special reserve study. In fact, reserve studies are compulsory in some states. 

For example, California requires each HOA to undertake a new reserve study, and make a new reserve funding plan, at least once every three years. This holds unless the current replacement value of the major components the HOA maintains is less than half of the gross budget of the association.  

Accordingly, you should maintain a reserve fund as per the requirement of your HOA and the governing laws. You may consider hiring a reserve fund expert for this purpose or decide to do it on your own.

#7. Take inflation into account

The better part of 2021 saw inflation rising steadily. Inflation, or rising prices, can take a real bite out of your budget. 

For example, the cost of maintenance rises with inflation, as currency is less powerful to pay for goods and services. This means that the amount of money needed for the annual upkeep of the community should result in an inflation-matching increase in annual dues to cover the costs.

Higher prices also mean you need to be more strategic about spending. So basically rethink the way you spend and find ways you can save money.

#8. Make sure to complete the HOA budget approval process

The budget approval process or ratification of the budget is an important part of the whole process to maintain transparency within the HOA community. It only makes sense to obtain approval for the proposal from the people you are collecting money from.

Once the budget is final, the HOA needs to present it to the homeowners and get their approval. The norm is to set up an annual meeting to run the annual budget by the association members.

Such meetings are also required by the law in some states, for example in North Carolina. The state’s Planned Community Act rules that HOAs must give an opportunity for budget approval within 30 days following the adoption of any proposed budget.

There you have it.

All the tips and best practices to plan a functional HOA budget. With all the information at your hands, it is time for you to give it a go.

Good luck!