“Bad” HOA Budget habits; Lessons learned from an ex-HOA President…
With HOA Budgeting season coming up, as a former HOA President – and more recently, a frequent HOA vendor – I’m sure that most in the HOA industry have seen more than their fair share of strange or bizarre behaviors during the annual HOA’s budget process.
While experience, professionalism, and practicality all certainly matter to help ensure a functional and reasonable budgeting process – it’s very frequently the “BUDGET DON’T’s” (or a lack of knowledge of the DON’T’s) that seem to get more novice Boards of Directors (or Board Members) in trouble.
One of the most basic flaws we’ve often seen in an HOA budgeting process starts right off the bat with original planning assumptions about the amount of expected revenue. Frequently, HOA Boards (or their property managers) will simply take the their total anticipated budget, divide it by the number of units in the community, and simply declare that this is the target per-unit rate for the dues. However, this very simplistic calculation doesn’t take into account many real-world and likely scenarios, such as the fact that it’s unlikely that the HOA will get “full” or “perfect” collections – either due to delinquent accounts, vacant properties, or otherwise. While there’s no perfect formula to help mitigate this, a good frame of reference is often to look at prior years’ collections activities or vacancy rates to help determine what the actual REALISTIC anticipated income for the Association will be. It will most likely be a few percentage points below 100% theoretical planned maximum income, depending on the level of delinquent accounts, vacancies, etc. in the community.
Another frequent mistake is underestimating the effects of price changes due to expiring/renewing contracts or other variable costs. At RiteTech, we see this all the time when assisting communities in analyzing their telephone, Internet, or cable TV bills. Frequently, carriers have the ability to change or modify their pricing unless specific contract(s) or price protections are in place. In other cases, certain telecommunications services may be very heavily taxed, and may be taxed more so depending on the carrier used and the way that the carrier’s service is regulated. Ironically, older accounts, older technologies, and older carriers (particularly ones that start with the letter “V”) often tend to be more heavily taxed under more antiquated and less favorable rules than more modern services. They also typically love to cram unnecessary charges, options, or other fees onto those telecommunication bills, knowing full well that the majority of their customers are simply going to pay them, without really questioning what they are, understanding what they are, or if they’re even technically necessary. In other instances, a larger and/or order location may have many phone lines or other services that are simply no longer even being used, and may not even be physically connected to any devices any more. This can be difficult to verify unless the lines are traced by skilled technicians who also know to look out for specialized devices such as elevator phones, fire alarm and/or security panels, HVAC or boiler monitoring systems, door boxes/card entry systems, or other specialized equipment that is typical to larger buildings or facilities.
Another favorite example relates to waste removal and snow removal. Frequently, waste removal involves variable costs such as “tipping fees” (or dumping fees), and/or fuel charges that may vary, even though the “base rate” may be protected under contract. Likewise, snow removal costs are typically a very difficult item to predict, as it very much depends on the weather.
As with most endeavors related to HOA governance, it’s best to get a healthy mixture of different persons involved with varying skills, experiences, and interests to help ensure that the budgeting process goes as smoothly as possible, and that the resulting budget helps to represent and enable the HOA’s and the membership’s priorities. Having at least one person (and ideally, more than one) experienced with budget preparation and accounting is extremely helpful – many would say, absolutely necessary – to help ensure that the process goes smoothly, and that critical mistakes are not made during this crucial activity.