Management Corner: Understanding HOA Budgets, Reserves & Assessments

Assessments are the monthly or yearly dues that members of a homeowners’ association (HOA) are responsible for paying. Understanding where every dollar of your assessment is going is important when choosing to live in an association and comparing homes within different communities.

The following are four questions community association managers (CAMs) often hear about HOA assessments. Read on to learn more about budgets, reserves, and assessments and how they impact a homeowner’s expectations.

1. Why do one association’s assessments cost more than another?

When purchasing a home in an association, it’s essential to investigate exactly what’s covered by the assessment fee. Everything that’s included should be outlined in the budget, and while some items may come with a higher price tag, cheaper isn’t always better. Before making a decision, carefully weigh your options and determine the true cost of living in a well-managed and properly funded community.

Following the sample budget above, explore factors like:

• Is the community located in a master association?

Based on the sample budget, master association assessments are an extra $50 a month. However, master associations often provide amenities like pools, gathering rooms, events, and playgrounds that can increase resale values.  

• Does the association pay for water, sewer, and trash services?

Homeowners must pay for these utilities one way or another—and in this example, it’s only $38.67 a month. Having these services bundled in your assessments can save you money and time.

• Does the association have fire sprinklers?

Having fire sprinklers and monitoring riser rooms to ensure pipes don’t freeze is a priceless benefit—one that won’t break the bank in this example.

• Are reserves adequately funded, and is there money set aside for repairs, maintenance, and landscaping?

Being proactive and setting realistic maintenance budgets is crucial. Deferring maintenance will often end up costing you more in the long run.

There’s a lot more to consider than price when selecting an association. Always look at budgets, ask for a copy of the reserve study, and do your research to make sure you’re comparing apples to apples.   

2. Why am I paying $300 for snow removal when my driveway isn’t plowed right away?

In the sample budget, the entire landscape and snow removal year-round services contract is $82,000, or less than $35 per month—not $300. This usually covers weekly mowing, shrub trimmings, fertilizer and herbicide treatments, and snow removal on driveways, roads, and sidewalks. All things considered, it’s a pretty good deal. 

Most homeowners feel disappointed when their expectations don’t meet the contract parameters. However, it’s important to understand that you’re generally getting the level of service you pay for. A snow removal contract typically doesn’t guarantee removal down to the pavement or ice-free conditions in a snowy climate; the contract provides reasonable snow removal a set number of hours after a snow event. Landscape and snow removal companies bid out contracts to a service level that fits the budget and requirements stipulated by the board. Any provider could offer a higher level of service, but that comes at a higher cost.

3. Why are assessments so high?

While it’s possible some line items might be over-budgeted, it’s more likely the assessments are set too low. Remember, the assessments are set by board members who are homeowners, and they pay them, too. It’s unlikely they would artificially inflate the assessments without reason. The key is to look at what they cover and recognize the value of maintaining the property as a group of homeowners.

Keep in mind, there are some costs that the board can’t control. For example, general administrative costs for mailings and communications are required to comply with state statutes or governing documents. Other necessary items include the tax return and yearly audit or review, water, trash removal (if applicable), and legal and collection fees. The association must pay for these whether the board correctly budgets for them or not. It’s much better to have a realistic budget than not be able to afford actual expenses. Lastly, other items provide incredible value. For example, hazard insurance may be significantly more affordable for HOA homeowners than typical single-family homeowners.

4. What are capital replacement reserves, and why are we spending so much money on them?

Capital replacement reserves are the association’s savings account for long-term repairs. Think roofs, siding, roads, and other major components that last a long time and are very expensive. Many associations are underfunded in their reserves. Essentially, they don’t have enough money to cover all estimated future expenses as they come due. Major property components are continuously deteriorating at a calculable rate, and associations that don’t regularly deposit money to offset that breakdown are quietly falling behind and setting themselves up for a special assessment.

The best way to ensure funds are available when they’re needed and avoid special assessments is by hiring a firm to complete a professional reserve study. These companies are experts in evaluating the current condition of major components, calculating deterioration rates, estimating replacement costs and rates of return on investments, and putting together a reserve schedule that spans over 30 years of all expected projects. The reserve study should be reviewed annually and updated every three to five years as prices and the condition of components change. Are the roofs deteriorating faster than expected? Are the asphalt roads lasting longer than expected? These are all factors that change the reserve study’s recommended contribution.

More from the Management Corner

"You can't tell me what to do!" is a phrase CAMs often hear from homeowners regarding their property in an HOA. Contrary to popular belief, this phrase is accurate—CAMs don’t tell homeowners what to do; they’re merely the messengers. When you purchase a home in an HOA, you've agreed to abide by the association's governing documents, or the documents that detail what homeowners can and cannot do. Read our article, “Management Corner: What You Should Know About Association Governing Documents,” to learn about these documents, their importance, and more.