As the summer comes to a close, HOAs in should consider budgets

Before your Board crunches next year’s numbers, have you given consideration into using a professional association management service to determine your budget?  Management companies provide a varying array of financial services that are specific to HOAs, but more importantly, they are unbiased and do not have a vested interest in your community, which makes them ideally, unmotivated, to push an agenda. 

If you live in an HOA, all homeowners and their Board, share in the potential for liability. An association-specific management company will bring expertise that will stretch your association’s financial dollars and build a more financially-stable membership. Hiring a third party service, especially to handle the books, decreases an organization’s risk of exposure and offer protection that property managers or volunteer Board members cannot. 

HOAs that fail financially are the result of individuals who are allowed to independently handle the financial decisions for the entire association. Their limited understanding of cost projections and their inability to access resources directly impact an association’s vision for protection. 

According to Michael Madson, President of MGM Association Management, who has run a successful association management company for the past 20 years, suggests these basic bookkeeping principles:

1.     Don't use last year's numbers

“That's called historical-based budgeting.  It's easy and fast, but most are against it.”  Instead, he advises starting each line item at zero.  “HOA Boards should do the research to justify how much money they'll need for the upcoming fiscal year.   It's a process known as zero-based budgeting.”

“Historical-based budgeting is less accurate and more likely to result in charging homeowners too much money or not charging them enough,” he said.  Zero-based budgeting is the more conservative approach and actively involves the attention of each Board member.

2.     Rebid all your contracts

Rates change dramatically within a short time.

For example, insurance can be a big cost savings since markets change each year. Rather than just renew a property's insurance, Boards should shop around or ask for an updated rate. “It is recommended to get insurance bids at least every three years,” according to Madson.         

“Underwriters have some effect on the figures they are quoting,” he said.  “If you push back a little on them and ask is this your best price, or if they know you are looking at other insurance companies, they'll be a bit more conscious of what they quote on a contract renewal.” 

3.     A Board should have vision

“Real estate agents see homes in self-managed associations difficult to sell and home values are typically weaker compared to a financially stronger HOA,” according to Madson.  “That's because conventional lenders scrutinize the finances of the homeowner’s association just the same as they scrutinize those of the prospective buyer.  If the association cannot meet certain requirements, such as 10 percent of the annual budget going into reserves or fewer than 15 percent of homeowners having delinquent accounts, the loan won't be made,” he said.

“Self-managed boards are often unaware of these requirements, because they lack the correct lens to have vision for their HOA,” says Madson.  He suggests looking for association managers who are members by the Community Association Institute (CAI), a national HOA organization that requires competency in financial budgeting, training and education. He said that these affiliations can guide associations toward a better community vision and financial stability. 

Furthermore, Madson states that, “a professional management company can offer a menu of services, not just financial oversight. Boards can pick and choose specific duties such as managing a project, like landscape maintenance, or community inspections, providing immediate access to their financial statements or paying dues online.”

If you are interested in learning more about the Community Association Institute (CAI) or financial services specific to HOAs, contact MGM Association Management at (208) 846-9189, or visit their website at www.gomgm.com.