Common HOA Budgeting Mistakes & How to Avoid Them

While homeowners’ association (HOA) board members have a duty to manage funds responsibly, a lack of planning can lead to poor budgeting decisions and financial consequences. Even with the best intentions, a board member’s mistake can mean higher assessments, underfunded reserves, and missed community enhancements.

Read on to learn more about budgets and tips on how to avoid common HOA budgeting mistakes.

Mistake: Ignoring Delinquencies

HOA fees and assessments provide the monies needed to carry out the community’s responsibilities, like maintaining shared spaces, saving for future repairs and improvements, and enforcing community guidelines. While collecting unpaid assessments can be challenging, it shouldn’t be ignored. Letting even a couple of delinquencies slide by can disrupt your association’s entire budget and lead to potential legal trouble.

To ensure that the association doesn't suffer from cash-flow shortages:

• Regularly monitor assessments—who’s paying, how regularly, and how much.

• Diligently examine delinquencies, proactively addressing unpaid funds.

• Ensure you assign a person, such as a community manager or treasurer, who homeowners can contact for payment questions or concerns.

• Enforce collections and payment policies consistently.

Mistake: Underfunding Reserves

An HOA reserve fund pays for large-scale projects and unexpected expenses. Depending on state requirements and your HOA’s governing documents, your board must retain a certain amount in the community’s reserves to provide financial protection to association members.

Underfunded reserves might mean you don’t have enough to cover community repairs or necessary replacements, leaving a financial burden on homeowners. The association may also fall behind on projects that can potentially enhance the community. Unfortunately, as much as 70% of HOAs have underfunded reserves, with 30% severely underfunded.

The best ways to stay on top of HOA reserves are to:

• Plan regular reserve studies to inspect community assets and shared spaces

• Use the reserve study results to identify priorities and create a funding plan

• Consider setting up automatic contributions to your reserve fund

• Monitor and adjust investments as needed

Mistake: Sitting On and Forgetting About Vendor Contracts

With so much to do during the HOA budget approval process, it’s easy to forget about existing vendor contracts. However, these ongoing contracts could be costing your association time and money.

If you don’t reassess HOA vendor contracts regularly, you may be paying for products or services you don’t use. Plus, the vendor might not be holding up their end of the contract with the quality or frequency of service.

Instead of sitting on vendor contracts, make sure to:

• Review all contract terms annually

• Evaluate the community’s satisfaction with the vendor

• Confirm that the services performed are what you’re paying for

• Ask the vendor if you’re getting the best rate for their services

• Shop around for other options if the vendor is falling below expectations

Mistake: No Long-Term Financial Plan

Part of the board’s responsibility is to set the association up for future success. When creating the budget for the coming year, it’s important to remember that the decisions you make now can affect the community’s long-term financial goals.

HOAs with at least a three-year financial plan can more accurately set assessments, allocate resources, and prepare for upcoming projects. Long-term plans also mean homeowner contributions are steady and calculated, reducing the risk of special assessments or unexpected dips into reserve funds.

If you don’t have a long-term financial plan in place, you should:

• Use a multi-year HOA budget example as a template to help you get started

• Create a multi-year budget that factors in major projects and future maintenance needs

• Establish realistic financial goals for your community that future board members can continue

Mistake: Inaccurate Expense and Inflation Forecasting

To create an effective budget, board members must have a firm grip on upcoming mandatory and discretionary expenses—and have a finger on the pulse of the current inflation rate. When the board fails to predict expenses and inflation rates accurately, regular HOA assessments might not be enough to reconcile the budget, and you may be forced to find funds elsewhere.

In some cases, reserve funds can be used to pay these expenses. However, the board may need to apply special assessments to cover costs, which can lead to negative feelings or distrust toward HOA leadership.

To avoid inaccurate expense and inflation forecasting, you can:

• Regularly monitor the inflation rate and evaluate and update the budget to ensure everything is current.

• Review historical data, like past financial statements, expense reports, and trends, to gauge how inflation impacted your community in the past.

• Identify spending patterns that can help you reach more accurate estimates.

• Budget with realistic, inflation-adjusted projections to avoid shortfalls when costs inevitably rise.

• Consult with your community’s HOA-certified public accountant (CPA).

   

Mistake: Failing to Communicate the Budget Effectively

Communication and transparency are the foundations of a strong relationship between an HOA board and association members. Because homeowners trust you to manage the community’s funds, it’s crucial to be open and honest about the budget and how it could affect them.

Failing to share the budget effectively can lead to suspicion that funds are being mismanaged. Association members have the right to know how their money is being used, and board members could face backlash for not making budget details readily available.

Keep homeowners in the loop by:

• Developing a clear and concise budget report that’s easy to understand

• Creating budget summaries with graphics for people who want a simple breakdown

• Using multiple communication channels to share the budget and reach as many members as possible

• Holding informative meetings to discuss the budget in detail

The Beginner’s Guide to HOA Budgets

While creating an HOA budget can be an intimidating responsibility, board members can avoid common HOA budgeting mistakes with careful planning, open communication, and an effective use of resources.

To help you manage your community’s finances and get ahead of budgeting needs, check out our ebook, “The Beginner’s Guide to HOA Budgets,” for insider tips.