The HOA budget serves as an association’s financial guide for the year. Without it, association boards would have no way of anticipating expenses and calculating regular dues. That said, communities can’t just use the same annual budget over and over again. It requires careful planning and oversight.
What is the HOA Budget?
The homeowners association budget is a financial planning tool used to anticipate income and expenses. An HOA has one primary source of revenue: regular fees. Other revenue streams include special assessments, fines for rule violations, and rental income.
Typically, the HOA board is responsible for planning the annual budget. That said, many communities designated a separate budget committee for the job. This committee, typically led by a board member, is responsible for outlining the expected revenue and expenses for the upcoming year.
The Importance of the HOA Annual Budget
An association relies on its budget as it sets the financial tone for the year. It serves as a guide for the association’s expenses, informing boards when they have exceeded the budget limit. The HOA budget essentially helps the community stay on track.
Additionally, HOA budget planning is critical because it helps determine the regular fees. Boards use this tool to calculate how much each homeowner must pay to the association. After all, an HOA can’t cover its expenses without its primary revenue stream.
If nothing else, the budget is integral in promoting transparency within the community. Homeowners have a right to know how the association plans to use their fees. The budget also lets them know how the board arrived at the fee amount.
HOA Budget Requirements in Texas
Section 204.010 of the Texas Property Code grants associations the authority to adopt and amend budgets unless the governing documents say otherwise. Board members should check their CC&Rs and bylaws for clarification.
Furthermore, Section 209.0051 requires HOA boards to consider or vote on the annual budget at an open meeting. The board must give prior notice of this meeting to all homeowners. Board members can’t approve the HOA budget or its amendments at a closed or electronic meeting.
How to Prepare the HOA Yearly Budget
The budget plays a key role in the financial success of any homeowners association. Unfortunately, not all board members think about budget preparation. Here’s how to plan an HOA budget effectively.
1. Schedule a Budget Meeting Early
The HOA board or budget committee should begin planning the annual budget well in advance of the start of the next fiscal year. Most associations commence planning at the end of the summer or early fall. This gives the HOA enough time to consider all factors.
It is also essential to schedule a separate meeting for budget planning. Don’t include it as part of a regularly scheduled board meeting. Designating a full session for budget planning allows the board ample time to discuss and estimate.
2. Establish Goals
The community’s goals will inform what the budget must include. What does the HOA wish to achieve within the next few years? Are there any major plans ahead?
For example, if the association wants to build a new amenity, it must start incorporating the cost into the budget early on. Spreading out the expenses across several years is more financially prudent than collecting a considerable sum from owners in one go.
3. Prioritize Maintenance and Repairs
One of the association’s primary responsibilities is to ensure the maintenance of common areas. Because of this, the board should place great importance on maintenance and repair costs. Include vendor fees, supplies, tools, and other related items under this expense.
4. Include Landscaping Costs
Landscaping for common areas is equally important, especially when enhancing curb appeal and property values. The HOA budget should include landscaping costs, such as professional fees, planting expenses, and other related expenditures.
Associations can also consider cost-effective landscaping strategies. For instance, annuals cost much more than perennials, which don’t require yearly replantings. The HOA can also start saving money for a sprinkler system that promotes water conservation.
5. Factor in Insurance
Insurance is essential to any HOA community. The budget should not only include the cost of premiums but also deductibles (if applicable). By doing this, the board can anticipate costs without sacrificing allocated funds for other expenses.
6. Consider Utilities
If the association pays for utilities, the budget should also factor them in. Typically, the HOA covers the utilities for common areas, but some, such as condo communities, might also pay for owners’ utilities.
7. Add Management Fees
Most HOAs seek professional help at some point. This could be in the form of an HOA management company, an accountant, a lawyer, an engineer, a reserve study specialist, or a combination of them. It is essential to include their professional fees in the budget.
8. Anticipate Administrative Costs
Administrative costs encompass a wide range of expenses, including paperwork, filing fees, phone bills, and office supplies. If the HOA incurs any of these expenses, the budget should reflect that.
9. Include Special Projects
If the association has any plans for special projects, the board should include them in the HOA budget. Special projects can range from social events and gatherings to workshops and seminars. They are designed to boost morale, educate residents, and build a stronger sense of community.
10. Plan for Reserve Contributions
While Texas HOAs are not statutorily mandated to maintain reserves, it is best to check the governing documents to determine if there is any such requirement. Even without a requirement, associations would be wise to maintain a reserve fund anyway.
The HOA budget should include a separate line item for reserve contributions. The exact amount will depend on the association’s needs, typically as outlined within a professionally prepared reserve study.
HOA Budget Best Practices
When planning the annual budget, associations should adopt the following best practices:
1. Refer to Historical Data
Many association boards are unsure of where to obtain the numbers for their budget. Historical data provides a good starting point.
Board members should look at past budgets, both planned and actual, to use as a baseline. This will provide boards with an idea of the cost of each line item. Previous financial statements can also help inform decisions and estimates.
2. Consider Increases and Economic Factors
Expenses are likely to fluctuate from year to year. The cost of goods and services tends to increase over time, as influenced by economic factors. Boards should consider these factors, including inflation and rising wages.
3. Negotiate With Vendors
Associations should reevaluate their vendor and insurance contracts, especially those set to expire. Board members should use this opportunity to renegotiate terms and fees in an attempt to lower costs. Even if boards can’t lower costs, speaking to vendors will help them determine upcoming expenses with more accuracy.
The Bottom Line
The HOA budget is a financial planning tool that associations can’t do without. Not only does it guide communities in navigating revenues and expenses, but it also helps set future boards on the right path.
Preferred Association Management Company offers exceptional HOA management services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
RELATED ARTICLES:
