Even though budget numbers don’t have quite the same nuances of words, how and why they are used has an enormous impact on the well being of the homeowner association. There is a creative process that should be followed to ensure thoughtful results. That process should be guided by this principle: The budget must be adequate to properly maintain the biggest and most important investment the members have (their home) and enhance the livability of the community I general.

To that end, a draft budget should be compiled based on the previous twelve month expenses as adjusted by known future trends like increases in utilities and service contracts. To this is added a Wish List. Then, the budget is presented to the Board for discussion. (Your HOA may also require member input and approval). The approved budget should be communicated to the membership a minimum of 30 days before the start of the new fiscal year to advise of any assessment changes. Some other important goals of creative money management:

1. Provide Adequate Detail. Your budget must be detailed enough to identify significant costs like fence, deck, painting, roofing, electrical and plumbing. Only if there is a breakdown can trends be tracked. If plumbing expenses are much higher than normal, find out why. If there is a weak link in the plumbing system that is bound to fail again, the budget can provide preventive maintenance rather than reactive maintenance. This way, you can avoid costs for cleanup and disruptions that floods always cause.

2. Spend Wisely. Many budgets are inadequate to the tasks they were designed to handle. Sooner or later the property shows it, market values and livability declines. Do not try to do this on the cheap. The Board is not elected to keep assessments as low as possible. The charge is to manage HOA business efficiently to get the best value for maintenance and services. Spend, but spend wisely.

3. Follow a Reserve Plan. Having a long range schedule and funding plan for future repairs and replacements is one of the most important parts of the budget. A 30 year projection along with a monthly funding plan is the right way to go for all condominiums and homeowner associations with substantial common elements.

4. Communicate to Membership. Invite them to attend the Board Meeting where the budget will be approved or hold a special meeting. Answer all the questions clearly. Garner member support early to eliminate challenges later on.

5. Produce Regular Financial Reports. The Board and Manager can track revenue and expenses and make changes as needed rather than waiting until it's too late. Distribute the financial reports to the members.

6. Enact a Collection Policy. There is no government bailout for HOAs. If one member fails to pay, the rest will have to. The longer you wait to collect, the greater the chance of not getting it. And if you have nomoney to pay the bills, just think how "creative" you’ll need to be.

Money is the lifeblood of an HOA. You need it to survive but with a bit of creative accounting, your HOA can thrive. Nuance your numbers and see.      BACK

Reserve Paradigm
Homeowner associations across the nation have discovered the advantages of planning ahead for major maintenance by following a well executed Reserve Study. A Reserve Study identifies the building and grounds components that the HOA is responsible to repair and replace that have useful lives of 3 to 30 years. These components require cyclical maintenance so the cost would typically not be included in the annual Operating Budget. And when these repairs come due, the cost is often enormous. If not planned for years in advance, the money would not be there.

A Reserve Study lays out a plan that is fair to all members along the 30 year time line. By dividing up the costs into 360 monthly payments (as in the case of condominiums and other common wall communities), each member pays only the part of that 360 months applicable to their ownership in the HOA. If all members are paying monthly, no member will get stuck paying for someone that didn’t. That is what a special assessment is: You just got nailed because those that bought and sold skated on paying their share of these costs.

But your HOA is different, right? Even if these costs have been handled by special assessments in the past, your Board won’t continue this clearly unfair method...right? Sadly, many Boards keep trudging the same path because "that’s the way it’s always been done". Progressive states have realized that special assessment funding is irresponsible and have enacted reserve funding requirements for their HOAs. In those states that haven’t, it’s incumbent on the Board to plan for these events without being told to. It is simply the right thing to do and to do otherwise is negligent.

Adopting a Reserve Planning philosophy is what the business gurus call a "paradigm shift". There is often significant resistance to change from certain HOA members who view it as an added cost. These folks like to live on the edge and often have more month left over than money. For them, problems aren’t problems until they are long overdue.

While individuals have the right to live on the edge for personal finances, this does not work in a homeowner association where the finances are inextricably linked. Reserve Planning recognizes this phenomena and charts a course where all participants play their part.

While a Reserve Study charts the course, it doesn’t establish the policy. A plan without a policy is like a ship without a rudder. It may sail straight for a while but then change course because a new captain is at the helm. A Reserve Policy holds future boards to the original course. It identifies what will be included in the Reserve Plan, how it be funded and restrain future Boards from unilaterally deciding not to follow it.

Since Boards can and do change frequently, having a clear philosophy on reserving is critical. It will help stop the all too common boom and bust cycle of one Board putting money away and the next one spending it.

If your homeowner association has not had a professional Reserve Study performed, do yourself a favor and do it. Having large numbers of units/homes is not the determining factor. Curiously, the smaller the HOA, the more critical a Reserve Study is because the cost per owner goes up. So, get it done and adopt a Reserve Plan & Funding Policy so this paradigm becomes reality.

See Policy Samples for a Reserve Plan & Funding Policy.      BACK

Reserve Study Protocol
The reserve study is one of the most valuable planning tools available to the Board of a homeowner association. But all reserve studies are not created equal. Like painting, there is a right way and a wrong way to do it.

Some HOAs attempt to perform a reserve study internally, without the assistance of a Reserve Analyst. Many of these studies have measurement and cost errors plus missing components which create huge disparities in the projections. In many cases, there is no audit trail which tracks the source of the information used for each component. It often appears as though numbers were derived using the FTA (From Thin Air) Method (or was it the SWAG Theory?).

While an internally generated reserve study can work in theory IF the person performing it has specialized training, there is always the issue of conflict of interest. How can the results be free of bias when the preparer has a vested interest in the outcome? Would you let a Board Member perform an audit on the HOA’s books? For the most reliable results, it’s highly recommended that this task be reserved for professionals with the proper training and experience.

When requesting a reserve study proposal, laying out the scope of work is very important like any complex project. A Request for Proposal ensures compliance with state statutes and that the Board receives the information needed to make sound financial decisions.

It’s highly recommended that the Board preview a sample reserve study before hiring a company to do the work. The reserve study you order should be laid out logically and easily understood by laymen. If the Board can’t grasp information easily, the report will be of little value.

The Reserve Study itself should include a Table of Contents, Analyst’s Qualifications, List of References, Limitations of Study and Methodology Used. In addition, there are several key reports:

Component Summary which includes:

A reserve study that includes these features will provide the Board with an indispensable and usable planning tool which will help in maintaining the HOA’s assets in their best condition. To ensure you get what you pay for, insist on a proper protocol.

Article concept by Kenneth Rowan of www.afiprofessional.com       BACK

Check Mate
HOA bookkeepers know it’s coming and there’s nothing they can do about it. With each new month comes a flood of personal checks to process. Other activities come to a halt while the checks are entered into the database, endorsed and batched for deposit and carted to the bank.

But wait! There’s a better way. What would you think of a system that required handling each check for less than two seconds. And during that time, you achieved flawless posting to the correct account and electronic depositing to the proper bank account, all at the same time?

In March 2002, banking regulations changed to allow checks to be converted to Automated Clearing House (ACH) items. Before, only larger businesses could use this system (called "lockbox" service) and it was costly.

Bob Jones of SureChecks notes, "Businesses like homeowner association which have sporadic waves of checks will benefit from this new system." The PC based system exports files to the accounting software, is easy to use and includes email notification to each payee as the check is scanned. The system uses a small desktop check scanner and a PC program installed on any computer using the Windows 98 (or later) operating system.

The cost for using the SureChecks system varies depending on volume but generally saves significant labor and postage and supply costs. Homeowners associations and management companies can often experience dramatic savings. For more information, see www.surechecks.com      BACK