5 Costly Mistakes that Board Members Should Avoid When Preparing the HOA Budget

So you’re getting ready to prepare your HOA’s budget. You and your fellow board members and homeowners are going to make big decisions that will affect the entire community.

The budget preparation process can feel daunting and it is arguably the most important job of the HOA board. Budgets are more than just numbers. They represent the priorities and resources of the community.

Everyone involved in the process should be on the same page: the needs of the community come first. Even with the best intentions, an HOA can stumble and create a bad budget. Here are some of the most common places these important documents go wrong.

Not Categorizing or Itemizing Expenses Adequately

Every HOA has its complexities. Even the smallest association has a tapestry of expenses. A common budgeting error is making categories too broad and not itemizing those expenses.

For example, an HOA may decide to have a single line in its budget for maintenance. All maintenance costs get thrown into one big bucket. When that bucket overflows and costs are more than expected, the board has a problem.

Without more granular categorization and itemization of expenses, it’s extremely difficult to know where that budget item went wrong. Was it a component that deteriorated more quickly than anticipated? Was it high vendor costs? No one wants to dig through every transaction for the year to find out.

Use smart tools to get the budget categorized and expenses itemized the first time. Breaking that single line into categories like landscaping, plumbing, electrical, cleaning, painting, and more saves you time in the long run.

Throughout the year, those categories become home to itemized expenses that you’ll have at your fingertips when it’s budget preparation time. Your Homey budget tools allow you to pinpoint specific areas where the budget needs adjusting.

Not Reviewing Past Budgets

That brings us to another area where mistakes are common. You need to review spending from the previous year. Little miscalculations can add up to big budget inconsistencies.

Use Homey’s tools to look at every category of your previous budget. Knowing where your numbers were off is important as you set out to create a new document. Review expenses that were unbudgeted and assess whether to include those in the upcoming budget.

In HOA budgets, as in life, those who don’t learn from history are bound to repeat it. Last year’s mistakes can help improve this year’s budget.

Inadequate Insurance

No one likes to pay for insurance. A common mistake is to choose the minimum amount allowed by law (and governing documents) for the lowest possible cost. This is not a risk worth taking.

You may never use that insurance, but if you need it, the expense it covers is probably large. You don’t want to discover that your deductible is sky-high or that your inexpensive insurance doesn’t provide adequate coverage.

Every year, the HOA board and the budget committee need to review the HOA’s insurance policies. Make sure they are adequate and up-to-date. If your current company’s costs have risen significantly, it might be time to look for another carrier.

If you do get new quotes, make sure to carefully review the policies being offered. Don’t cut corners on insurance.

Not Negotiating with Vendors

Do you hate to haggle? Doesn’t everyone hate to haggle? Don’t think of negotiating with vendors as haggling. You aren’t trying to squeeze the companies you work with. You’re trying to arrange necessary services at a price your community can afford.

This is an excellent place to make full use of your property manager or management company. They not only have negotiating experience, but they also have a good working knowledge of pricing in your area. Their familiarity with all aspects of your property allows them to contact the right vendors and negotiate the services you need.

You may find that your vendors offer loyalty discounts or a less expensive version of your current services. As you review vendor contracts, you may find that it’s time to make some changes. You don’t have to stay with a vendor whose prices are too high or whose work no longer suits your needs.

Not Building in a Buffer

Understandably, HOA boards want to keep fees as low as possible. Sometimes that leads to a very lean budget. Figuring out exactly what you expect to spend in every category of your budget is wise. Only budgeting for that amount can come back to bite you.

We all know that unexpected expenses arise. We can’t always predict global economic shifts or the impact a global pandemic may have on the costs of goods and services. To make a budget that’s so tight that it doesn’t have room for those unanticipated costs’ risks raising dues or special assessments.

Best practice is to budget for a little more than you expect in every category. If you need it, you’ll have it, and if not, it’s okay to end the year with a surplus. You can add any extra to your reserve funds.

Your property management company can help you identify which categories are the most likely to go over budget. Add a little extra padding in those areas.

Failing to Account for Inflation

There is a particular subsection of an overly-tight budget that can really come back to haunt you: inflation. We did not expect inflation to soar last year, but your HOA should always build in some room for rising prices.

Do your research on current trends and predictions so you can adjust your expenses appropriately. Use your Homey software to review previous costs and make comparisons so you can update as accurately as possible.

Ways to Avoid Mistakes

Now that you know what some common mistakes are, how do you avoid them? In the overall management of your HOA, using software tools and getting help from a property management company can work wonders.

Good software keeps all your planning in one place, available to the entire board. Homey’s online platform allows you to visualize your long-term reserve plan, review your governing documents, and access insights into your HOA’s operating spend.

Working with a property management company adds another professional to your team. Your property manager comes with experience and insight into the budget planning process. As team members who are not community members, property managers offer an extra layer of objectivity.

Preparing an HOA budget is a big job, with lots of moving parts. Keep everyone on the same page by sharing data and setting priorities. Make good use of your available tools and the professionals on your team. Set a reasonable timeline and plan meetings accordingly.

The more organized you are, the more successful you’ll be in creating a budget that works for your community. Just being aware of common mistakes helps you avoid them. Your HOA board is always walking the fine line between providing necessary and desirable services and keeping costs down.

The more transparent your team is in the budget process, the easier it is for homeowners to understand the decisions you make. Homey’s tools allow you to prepare presentations and share your hard work with the whole community. Better communication leads to better homeowner satisfaction.

Don’t be afraid to use the professionals on your team. Your property manager, lawyer, and accountant/bookkeeper all have insights that will help you. They may spot mistakes or opportunities that the rest of your committee members miss.

Understanding common budgeting mistakes helps your HOA create a comprehensive budget preparation process. Knowing what to avoid streamlines that process and could end up saving your HOA a lot of money in the long run.