Every Penny Counts! The challenges HOA Property Managers/Board Members face when creating a strong budget.
If you have ever paid cash for anything, you have probably received change in return. In most cases, the change we get back goes into a purse, change jar, or the ash tray in our cars. Most times we don’t really even think about what we will do with it. In business, companies account for every dime they collect. They hire accountants, which sift through every transaction to account for every penny, so that the business is successful and makes the business owner a profit. Similarly, homeowner associations also must account for every penny collected in assessments. The main and often most misunderstood difference between a traditional business and a homeowners association is;
an HOA is a Non-Profit Corporation. As a Non-Profit Corporation the HOA must collect every penny it can but cannot make more than its expenses (with the exception of a small percentage of the income to go towards a reserve fund in case of emergency). Like all corporations, an HOA has certain expenses to keep the business afloat, such as; landscaping, water, sewer, trash, insurance for the community, upkeep/maintenance, and so on and so on. The HOA creates a budget each year to estimate what those expenses will be for the entire year. Then it divides that amount amongst the members (owners/residents) of the corporation. Below is a simple example for conversation sake.
A community has $120,000 in annual expenses. There are a total of 100 unit owners in the community and each pays $100.00 per month in assessments.
100 unit owners x $100.00 each month = $10,000 per month the HOA should collect
Multiply that by 12 months to account for the year = $120,000
With this calculation the HOA will have exactly the amount needed to pay all of its expenses assuming venders do not raise prices, an unexpected tragedy happens like a pool motor goes bad, or the HOA incurred an additional expense like legal fees. Based on the above example the HOA should be okay assuming nothing unexpected comes about . Unfortunately, sometimes life throws us a curveball which makes it difficult or impossible to make personal expense payments. On occasion this includes unit owner’s HOA assessments. This is an additional factor the HOA must account for. Using the same example, if 5 people (national average is 6% delinquency rate) out of the 100 unit owners are unable to make their HOA assessment payments; here is how the numbers change.
95 unit owners x $100.00 each month – $9,500 per month the HOA should collect
Multiply that by 12 months to account for the year = $114,000
That’s $6,000 of expenses the HOA can now no longer afford to pay. Let me remind everyone of some of the examples of those expenses; landscaping, water, sewer, trash, insurance for the community, upkeep/maintenance, repair and so on and so on. Which one of these necessary services should the HOA discontinue? That is the question HOA board members are faced with if budgets are not properly don.
The moral of the story……budgets must be taken very serious. If the board members are not being educated and guided by an experienced property manager on some of the possible pitfalls associated with HOA expenses, the next question members may have to ask themselves is, “which one of my home’s everyday services would I miss the most”. Because, Every Penny Counts!
To those individuals that have come upon tough times in this economy and were not able to make HOA assessment payments, this article is not directed at you. This article is intended to show the importance of looking at all possible factors and the impacts that could come from creating a weak budget.