Is a financial storm coming to your HOA? Here’s what to do when you’re hit with a large expense.
One of the most difficult aspects of an HOA board’s job is preparing the budget. It takes time and careful assessment. Once you have a budget, don’t think you’re home free, though. The community could get hit with unexpected expenses at any time.
Now what?
Here’s what you can do to weather a financial storm.
What is a sudden financial storm?
Creating a budget entails studying your cash reserves, current and past financial statements, and projected income for the year. You then have to estimate operating expenses based on what you spent in past years, remembering that things like utilities and insurance will almost certainly increase.
If the HOA calculates correctly, you should be good, right? Think again. Surprise expenses can really hit you below the belt.
Here are just some examples:
- Common area repairs/replacement (siding, roof, porch, HVAC systems, plumbing emergencies, electrical system failure/replacement)
- Unexpected/extreme increase in property taxes
- Damage from natural disasters (hurricane, tornado, earthquake, rain/flood, blizzard)
- Insect infestation damage
- Breakdown of equipment for the community pool
4 steps to prepare for the storms
Of course, the above examples are just some likely scenarios. Your HOA may experience countless other hits. So, how can you prepare and ensure you have money on hand to pay for the storms?
1. Expect the unexpected
The old saying is true, along with the law of averages: “If something can go wrong, it probably will.”
When you’re preparing a budget, just assume that unexpected expenses will occur at some point. Good financial management is sometimes about planning for disasters. Make sure you have cash reserves in order to weather them.
2. What could go wrong?
What happens when pilots undergo training in a simulator? Computer-generated disasters are presented and it’s the pilot’s job to figure out how to solve the problem.
Disaster planning is about determining all the possible things that could go wrong and then coming up with a plan to deal with them.
3. Ask yourself some questions:
- How old is the equipment in the community (pool, HVAC systems in community buildings)?
- What did heating and plumbing maintenance cost last year? Were there unexpected expenses?
- What is the state of the roads and sidewalks in the community?
- How much do you expect the community to grow this year?
- Will you need to hire additional vendors, a community manager, or other support staff?
- Will you be looking to switch vendors?
- What will happen if you experience a hurricane, earthquake, or other natural disasters?
- What if a homeowner or group of owners sues the HOA?
Discuss any scenarios you can think of and come up with a plan for how you would pay for them.
4. How will you pay for surprise expenses?
Imposing additional HOA fees or special assessments is something you want to avoid. While it might seem like an easy solution, it can result in a lot of angry residents.
Instead, try to set up a reserve fund. Just like you should have several months’ worth of savings in case you lose your job or can’t work, the HOA also needs “savings” on hand for unexpected expenses. This means you need to look at how much you have in the reserve fund. In some states, you are required to do regular analyses.
You can also have an outside accountant prepare something called a “reserve study,” which will give you an idea of possible expenses over a long period of time. The accountant will estimate the cost and timing of likely issues in your area to develop an estimate of what extra funds will be needed over the next 20 or 30 years.
Reserve funds can be temporarily used for operating purposes in the case of:
- Repair
- Restoration
- Replacement
- Maintenance
- Litigation involving any of the above situations
However, the reserve fund will need to be replenished if it’s spent. So even with the fund, significant unbudgeted expenses will eventually have to be covered by homeowner assessments. With a reserve, there’s a mechanism in place to cover these expenses and prepare for hardships in the future.
Prepare for disaster and you can weather the storms
Unexpected expenses will happen. Being prepared with adequate reserve funds will help your community survive. Hiring vetted vendors who do proper maintenance can actually help reduce the number of “disasters.” If you need help vetting and hiring vendors for your HOA, VendorSmart is here. We also offer a number of services, including risk management and compliance management. Contact us to get started.