budget fudge-factor?

Started by MichaelH34 • 4 replies • 592 views

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MichaelH34 (North Carolina)
Posts: 179

Posted:

For those of you that don't recall, New HOA, formed earlier this year after inheriting control from the developer. Developer budget was useless but at least he left us a pot of cash to start with.

We did the responsible thing and had a reserve study done, passed reserve increases with 100% homeowner participation (22 homes) and are working through another budget update due to last-minute vendor increases.

We have a budget for next year but just based on the last month I feel like we're going to be constantly robbing from one budget item or another to handle paper-cut level cost overruns.

I don't know how much of this is normal and how much is due to current economic conditions as well as that lovely supply chain problem we have now.

To the point of this post...

For those of you that have been preparing HOA budgets for years, how much do you pad estimates when putting in line items for the coming year? We've got some pad for expected inflation but as anyone who's paid bills, ever, knows, that's not an exact science.

Our Documents allow us to roll unused funds into the next year but one goal we've got is to keep dues as low as practical. I don't to have dues so high we never worry about overruns and have a bunch of slush left over at the end of the year. I also don't want to be worrying about every penny come each December because we've set the dues with little to no wiggle room.

Any words of wisdom from people who've been dealing with HOA budgets long enough that you feel confident in your work?

SheliaH (Indiana)
Posts: 6,964

Posted:

You have a new HOA, so right now you don't have a ton of data to learn from - give yourself a year or two and then You can look closely at the line items and see the beginning of some patterns. Note which ones increased faster than expected and find out why. Maybe it is a supply chain issue, labor shortage, both of something else. That's where You may be able to factor in one of two percentage points for those items.

You do have a huge advantage in that you got a reserve study done at the start and that's one area you want to stay on top of. Never forget inflation - a 2021 dollar won't buy the same in 2022 and beyond. You can Google inflation calculators, see if one's tailored to your area and use that to determine how much more you might want to build into the budget

I know you want to keep assessments at a reasonable level, but I think its better to focus on the quality of the services - ultimately that could help prevent assessments from rising too fast. That's why you want to pay close attention to your vendor's performance. You get what you pay for, and although you can expect price range ncreases, you should couple that with the quality of the work. Sticking with a good vendor can help down the road if you find they might offer some discounts to keep your business.

You have 100% participation of your neighbors in paying assessments - do what's necessary to stay on top of delinquencies. Hopefully you never have to deal with them, but better safe than sorry. Establish a clear collection policy, follow it consistently, but be willing to work with people who run into things like job loss. This will also keep costs and assessment increases in check.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

TimB4 (Tennessee)
Posts: 21,059

Posted:

After awhile, you won't need to pad estimates. You will have enough data to be fairly close.

Congrats on funding your reserves at 100%.

One thing you should consider is an operational buffer at the beginning of the year.
This is basically a balance in the checking account you try not to go below.
It allows for paying bills while waiting on assessments. For us, it was equal to one months normal bills (snow removal, utilities, lawn care, etc.). If you have a lot of delinquent accounts, you might need to increase that amount.

Another point to consider is to simply make a contingency line item in the operational budget or a line item that typically isn't exact. When I was the treasurer, this was the trees line item. Our tree line item was $1,500.

The board should also adopt a policy on what to do with excess operating funds (those that exist because actual costs was less then expected costs. I would suggest adding it to the reserves largest expense. We would add ours to the storm water management line item of the reserves.

HenryS7 (Pennsylvania)
Posts: 336

Posted:

Something to keep in mind:

The only number that is important is your revenue (what you set your assessments at). The subaccount categories (landscaping, maintenance, office expense) are just guesses and you can exceed or go under these values without repercussions.

As long as you collect enough in assessments to pay the expenses you have for the year, you are golden.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Hi Michael,

1. You can create a "Bad Debt" line item, which is a legitimate potential expense should a homeowner default on dues or not pay. Your budget will show a payment/accounting of 1/12 of that bad debt expense but your HOA will not spend cash unless it writes off debt due to a foreclosure (our HOA doesn't chase foreclosed owners and has lost two properties in 20 years but we have a small "bad debt" budget line item).

2. As a new HOA, shift your to goal towards maintaining the property at its present condition at the lowest monthly dues rate that is practical. A philosophy of keeping dues low as possible will lure the wrong types of board members who "save money" by not maintaining amenities. Your dues payers have agreed to pay dues and want a nice community in exchange for the restrictive elements of HOA oversight.

3. Don't touch that "pot of cash" you've been handed and don't let it fund routine, monthly expenses. Let your monthly dues be high enough to cover the bills. Track inflation and keep your dues aligned at the minimum....then watch expenses, especially contracted services and "fight" increases there as practical (don't lose great vendors), so that your revenues organically track inflation (thus rise) but you hopefully keep expenses in check at a rate lower than inflation (stay steady or grow just under inflation). This is a bit like arbitrage and you can't always pull it off but try.

Your budget needs some "real world" exposure (3-5 years) to garner some solid oversight. Reserve Studies are nice but no substitute to active, competent knowledge of the community condition and cashflow.

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