Setting up the operating budget for your HOA, townhome or condominium can sometimes be an arduous process. We’ll start simple here and work our way up to the more complicated budgets.
THE HOA BUDGET
Depending on the size of your HOA, your budget can be as simple or as complex as you want. This all depends on the number of amenities you have in your community. Below is a sample of a simple HOA budget:
(see note regarding budget at bottom of post)
This particular association has no amenities such as a pool, entry gates or playgrounds. As you notice, there is a surplus of $8700. Although that may seem excessive and you may be inclined to reduce your annual assessment (the amount each owner pays), the generally accepted rule is that you will have a delinquency rate of 10-20%, homeowners who do not pay their assessments. These surplus funds can be held in reserve to make up any shortfalls by those that don’t pay. If the vast majority of your HOA members pay their assessments, you very well could reduce your annual fees.
Every two to three years the HOA should put their contracts up for bid. This will ensure that your existing contracts are appropriate for your needs. This also provides an opportunity to open discussions with your existing vendors regarding any concerns they might have. An example would be your landscape contract originally bid your contract when gas was $2.00 per gallon, but two years later gas is $3.75 per gallon. Because of the increased cost, the Board of Directors might allow the vendor to increase their contract amount to a more reasonable rate if they are happy with the vendor.
The other line item that was not included in the budget above is liability insurance and Directors and Officers/Errors and Omission coverage. A liability policy will protect the association against lawsuits for events that occur on association property. For example, a car accident on the corner causes the driver to veer off the road, smash through the privacy fence surrounding the community, into the retention pond causing the drive to lose consciousness and drown in the retention pond. If the driver’s family wanted to sue the association for damages, the liability policy protects the association as a whole. The Directors and Officers/Errors and Omissions policy protects the Board of Directors from lawsuits where a member of the association wants to sue the Board of Directors for an alleged wrongdoing. Having insurance to cover the association for these possible scenarios is always prudent.
In the next post, we’ll cover how to set aside reserves in your HOA for capital improvements and amenities.
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