As a management company, when budget season rolls around every year we get board members asking us, “Can we compare HOA assessments to what other communities are charging?” Not only is this the wrong way to calculate your budget, it is also dangerous for your community’s fiscal health. Here’s why:
Monthly assessments are arguably the most troublesome part of running an HOA or condo association. Homeowners always want to go as low as possible, while the board struggles to maintain the community. It’s a constant game of chicken that no one is winning. Often this is because homeowners don’t realize that a community association isn’t just a place you call home, it’s a business and needs to operate as such.
But that can sometimes be a double-edged sword. HOAs are not “normal” businesses, and as such should avoid this common commerce tactic: price matching.
Every Community is Unique
It is tempting to look at what everyone else is doing when you sit down to establish your community’s fees, but community associations are all their own brand of special, and they all have something different to offer. So when you try to price match or compare HOA assessments with other local communities, you might as well be comparing apples and oranges. It doesn’t work, and it’s only going to cause problems because every community is different. Whether you’re in a large single family association or a 10-unit townhome HOA, you have responsibilities that can’t be compared to the guy down the road.
Your community assessments are one of the most important aspects of your budget. They should take into consideration general and long-term upkeep costs, insurance, and amenities, all of which vary widely from one community to the next. Copying a different community’s budget may mean that you cannot pay for everything your community needs, or that you are not saving enough to cover components when they inevitably break down and need to be replaced. Your association should be basing dues on your community’s expenses, planned capital expenditures (like major construction/repair projects) and your reserve study.
What if I Want To Remain Competitive?
You’ve got to remember that this is not a competition–at least, not one you can win with lower pricing. Yes, there is a fear when sitting down to create the next year’s budget that your association may be more expensive than others in your area. And attempting to undercut other associations by lowering the amount of your assessments might sound like a good way to draw in potential members. But your top priority is not enticing new owners–that’s up to the real estate agents. Your job as a member of the board of directors is to keep the community safe and financially sound.
Let’s say you’ve lowered your prices to match local communities. None of them have the security gate yours does, or the pool to worry about, and they don’t appear to maintain their landscaping as nicely, but your prices now match. Prospective owners will be thrilled that they’re paying the same as their friends 10 minutes away for significantly more value, but that’ll quickly fade to anger and frustration when the low association fees fail to cover standard costs of community upkeep, or when you don’t have enough to cover a broken down HVAC unit and a special assessment needs to be issued to compensate.
Special assessments and cost-cutting measures will make the homeowners lured in with low monthly fees feel cheated or tricked and will create a hostile atmosphere in the community. Being honest about your community’s financial needs and setting the correct rate from the start is a safer approach to budget management and the fulfillment of your fiduciary duty than promising a lower amount and being forced to tack on special assessments.
The Importance of Budgeting
Budgeting is important for a lot of obvious reasons: money doesn’t grow on trees and you don’t want to run out of it, for starters. There’s plenty more bubbling under the surface, though. Fiduciary duty is one of the top priorities of any association board of directors. You have a legal obligation to act in the best interests of the community at all times. That means being fiscally responsible, and a large part of that responsibility is accurately managing your community’s budget.
A budget should represent the actual costs of your HOA. Your community has expenses that must be paid, such as utilities, garbage pickup, landscaping, repairs, and more. You also have to take into consideration your preventive maintenance as well as any initiatives you plan on completing that year, like putting a fresh coat of paint on the lobby, making some much-needed improvements, or finally finishing that long-term project.
Your budget also has to include a savings plan to prepare for replacing components like air conditioners and elevators as they break down. Your community needs to have enough money coming in to cover all of these costs. A personalized budget based on real financial data from past years will be significantly more beneficial to you than someone else’s information.
The Right Way to Formulate Your HOA Budget
It is considered bad practice to pick a budget number and work backward to reach it. You want to have a real budget dictated by your actual costs like upkeep and other real line items. Follow the budgeting process closely: look at your association’s actual, projected, and historical costs. Look at your reserve study and consider the planned maintenance requirements your community should be funding. If you’re not being true to the budgeting process and taking an objective view of what you need to run your association then your budget will be incorrect. Once you have an accurate view of all of your expected expenses, you can determine how much each owner should be paying, and compare it to your current assessment amounts–NOT someplace else’s.
Educate Your Owners
Rather than looking over your shoulder at what other communities are doing, you should be engaging with your community. Yes, there’s a problem with low homeowner engagement, and that will always create an issue when it comes to managing your community budget. But the best way to work on lowering your monthly assessments is determining what matters to your community, not matching the monthly fees of the association next door.
Incentivizing community meeting attendance, or sending out a short survey to gauge what owners feel they want in their community could give you the insight you need to appropriately set your budget expectations and future assessment prices.
Your homeowners also need a little education. Remember, few of them realize that a community association is a business and needs to operate as such. It’s your responsibility to explain to them that they’re benefiting from a business model that needs appropriate funding, and pushing for lower and lower fees will only hurt them, and often cost them more, in the long run by deferring needed maintenance and damaging property values.
The Bottom Line
It is the board’s responsibility to determine a true budget for the association, based solely on the expenses of their community – current and long-term. Careful budgeting can lead to greater owner satisfaction, with few financial surprises over time.