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Crunching numbers: What goes into a community association’s budget?

Budgets are crucial to a community association’s financial operation. Just like for-profit businesses, association boards should work diligently to develop annual budgets that estimate revenue and expenses for the upcoming fiscal year. A properly drafted budget can help prevent reduced services, deteriorating property, or special assessments.

Many state statutes and most governing documents impose a legal obligation on boards to develop an accurate budget and collect sufficient assessments to cover expenses. A detailed budget helps residents understand why assessment amounts are reasonable and how their money will be used.

Community associations have two types of budgets: an operating budget and a reserve budget. Operating budgets have unrestricted funds that are used to run the association through the fiscal year, while reserves have restricted funds saved for expenses that will occur in the future.

The board is tasked with gathering the necessary financial information to project potential sources of income and expenses, including conducting a reserve analysis, looking at bids for contracts, projecting utility or service increases, and comparing past years’ budget trends.

Certain line items constitute expenses that associations are required by law or contract to pay and should be allocated for first. An association also should allocate contingency funds, separate from the reserve budget, for unanticipated expenses such as extreme weather, economic conditions that could increase fees for products or services, emergency repairs, and lawsuits.

Here are some of the most common expenses that associations should include when drafting the operating budget.

Maintenance. Allocate line items that protect and enhance the community’s property. A maintenance schedule should be developed or amended annually for budget considerations, and service contracts should be checked to anticipate potential increases or to negotiate a better rate.

Taxes. While assessments are not taxable, other sources of income, such as interest earnings, facility rental income, and income from goods and services, likely will be taxed. Other taxes that associations may need to pay include personal property, payroll (if it hires salaried employees), or real estate tax.

Utilities. Associations should measure past consumption of electricity and water to anticipate any increases. Conducting a professional utility audit can ensure meters and other equipment are functioning properly. The audit also can help an association determine if it can reduce expenses by installing energy-efficient systems.

Insurance. An association should ask its insurance professional to audit current property and liability coverage and recommend appropriate protection that fits its needs.

Administrative costs. These include expenses for professional services provided by consultants, reserve specialists, attorneys, and accountants, fees for banking and collecting delinquencies, as well as the costs of maintaining an office, including equipment, supplies, and phone and internet service.

Once your budget is drafted, share it with homeowners so they can review before the annual meeting.

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Safeguarding finances: 9 steps to prevent fraud and embezzlement in your HOA

Community associations fall victim to theft and embezzlement too frequently. Board members should know the warning signs and institute preventive measures before the community is left with a difficult recovery. Combining these safeguards should help to keep your association and homeowners from being victimized.

1. Know the association’s Federal Tax Identification (FTI) number. Use it to obtain periodic listings of all bank accounts and account numbers, and make sure they are all under the association’s name and FTI number.

2. Use a lock box system for deposits. A lock box allows owners’ payments to be mailed or transferred directly to the association’s bank accounts. This reduces the chance that the association’s money will be deposited into the wrong account.

3. Safeguard your association’s reserves. Like checking accounts, the reserve account(s) should be under the control of at least two people. Do not give one board member total control over reserve accounts.

4. Require duplicate operating and reserve accounts statements be sent every month. One statement should be sent to the management company (or, if self-managed, to the treasurer or bookkeeper) and the duplicate to a board member who does not have authority to sign the checks or make any type of transfer or withdrawal.

5. Check invoices against checks paid and the original receipts for credit card accounts, if any. If the association has professional management or a bookkeeper, the board treasurer should conduct this review. If self-managed, a board member without access to the bank accounts or credit card privileges should check for any unauthorized use.

6. Shop around for bank services. Unfortunately, some banks do not enforce dual-signature requirements or prohibit electronic transfers between accounts, despite being under different FTI numbers. If the bank wants your business, demand that it demonstrates the safeguards it has in place to minimize theft, especially through electronic transfers.

7. Insure the association’s money. Obtain fidelity coverage on the board members and the management company or bookkeeper, if any, in an amount that equals or exceeds the association’s reserve fund and several months of operating funds. Even with coverage through the association’s insurance carrier, the board should require evidence that the management company carries its own fidelity coverage, which would provide the first line of recovery in the event of theft by one of its employees.

8. Make sure the management agreement includes specific terms to require these safeguards. A professionally managed association should have its legal counsel review the original agreement and any renewal prior to execution, so the agreements are not riddled with lopsided terms that are detrimental to the association.

9. Regularly have an independent certified public accountant conduct an audit. While it may be too costly to conduct an audit every year, the board should commit to having one performed every few years. In the interim, the association should have an annual review performed, with the stipulation that the bank balances be independently verified.

This article was originally published on HOAResources.com, which provides information and tools to community association members living in condominiums, homeowners associations, and housing cooperatives. Read the full version here.

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Kickstart saving: Millennials turning to crowdfunding to buy homes

Millennials are buying homes later in life or forgoing the purchase altogether compared to previous generations. Between student loan debt, the high cost of living in large cities, and rising housing prices, buying homes has become less practical for young people, according to Investopedia.

Nearly 70% of millennials identify saving for a down payment as the biggest barrier to purchasing a home, according to Bank of America’s 2019 Spring Homebuyer Insights Report. When entering the job market, college graduates with student loan debt must save for an average of 12 years to afford a 20% down payment, compared to 7.6 years for those without student loan debt. For millennials without a college degree, that number rises to nearly 17 years, research from Apartment List finds.

Crowdfunding could be the means to make owning a home a reality for millennials.

Touting itself as the first crowdfunding platform for homebuyers, HomeFundIt offers millennials a way to enlist friends and family to help fund their down payment and other closing costs associated with owning a home. Once they complete a conventional financial agreement with a bank or a mortgage lender, millennials can tap into their networks to start saving.

HomeFundIt offers aspiring young homeowners two ways to boost their savings:

Crowdfunding. Homebuyers can encourage friends and family members to donate to their fund directly. They can tap into their networks by sharing a personal story on social media along with the link to the down payment fund. There are no transaction fees, and funds are available immediately. The program also gives young homeowners a grant of up to $1,500 for closing costs and offers free homebuyer education. The crowdfunding option is limited to one year before buying a home.

Cash-back rewards. The program, called UpIt, allows the potential homebuyer, their friends, and family members to have a portion of the money they spend on everyday purchases placed in a savings account for a down payment. Up to 20% of everyday eligible purchases at participating retailers such as Walmart, Macy’s, or Expedia are applied to the crowdfunding goal. The homebuyer doesn’t need to be prequalified, and there’s no time limit on when to have the funds raised. The money is available within 24 hours.

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Homeowner education: Be resourceful with CAI’s HOAResources.com

The best community associations have knowledgeable governing boards, highly-engaged residents, and educated and trained professional managers leading their communities. CAI has believed that since its founding in 1973, and it’s why we offer information, education, and resources to members and the general public. It’s why we recently launched HOAResources.com, a digital news site for the millions of residents living and working in condominium communities and homeowners associations worldwide.

We recognize that the community association model has evolved and grown up over the years, becoming a well-established and increasingly successful form of community governance and an essential component of the U.S. housing market.

There’s an increasing need to educate, train, and provide the latest news and resources to the millions of potential homebuyers, homeowners, and renters living in these communities. After all, 61 percent of all new housing built for sale is in a community association.

The new site lets CAI members and the general public find practical advice on common issues in the community association housing model. The site will address HOA basics, financial planning, rules and governing documents, as well as security and safety. Many time-tested best practices are showcased on the site, often through free, downloadable documents.

Go to www.HOAResources.com, and share the information with homeowners, friends, and colleagues.

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Turnaround leader: How a board president revitalized a community in financial disarray

When Michael Shucart took the helm as president of Leisure Town Home Association’s board more than five years ago, financial disarray and outdated amenities plagued the 1,150-home community in Vacaville, Calif. Now, the retired banker is credited with putting Leisure Town back on a path to success.

Development of the 55-and-older community first began in the early 1960s, and the association had gone without a professional community manager for more than 50 years. There had been little resolve from the board to raise assessments and make improvements. “The community was left deferring maintenance with little in the reserves for replacement or repairs,” says Shucart.

Undoing decades of neglect, Shucart developed a list of priorities “to help define our vision” after consulting with the community’s 1,800 residents. The board developed a plan to overcome years of deferred maintenance.

Michael Shucart

Drawing from his experience as a banker specializing in wholesale mortgages, Shucart also reviewed each line in the association’s budget for cost-saving measures. He saw that the reserve study replacement costs were unrealistic and that vendor contracts could be improved.

“I realized all of our vendors were friends of friends. As a result, most of them were not giving us favorable conditions,” says Shucart.

In addition, after more than five decades without a manager, the board decided to hire a full-time, on-site manager to fill the void in day-to-day operations.

Through these steps and a few others, the community recently unveiled updated amenities including a new bocce court, a lawn bowling field, a remodeled swimming pool, and a new fitness center for residents. 

Because of the contributions that have improved Leisure Town’s financial standing and infrastructure, Shucart was named Homeowner Leader of the Year by CAI’s Northern California Chapter in 2018.

Shucart credits the success of Leisure Town’s turnaround to the collaboration with the other members of the board. He also points out that effective leadership “starts with identifying the concerns of membership, putting a plan together that addresses those issues, and working together in the best interests of the association toward a solution.”

But the work is far from over. Shucart has already set future goals to address at Leisure Town. “We are figuring out how to deal with the closure of our golf course, trying to bring in recycled water to use for the roughly 17 acres of green space, and installing new solar panels to offset the cost of electric usage,” he says.

April is National Volunteer Month. Read our articles about preparing for a volunteer role and five steps for effective community leadership. And stay tuned for another look at inspiring work done by a homeowner leader.

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A community’s last resort: Foreclosing on a home

Nobody wants to foreclose on a home—not a mortgage banker and certainly not a community association. Countless Americans lose their homes when lending institutions are unable to collect mortgage payments. In a perfect world, no one would ever face foreclosure—for any reason.

That’s why foreclosure should always be used as a last resort, applied only when a community association has exhausted all other collection options and only when a homeowner refuses to remedy a significant debt to the association.

CAI does not support people losing their homes to foreclosure for insignificant sums of money. Even when the debt is significant, foreclosure should be considered only after other approaches have failed. In all cases, homeowners facing foreclosure deserve reasonable opportunity to appeal the issue to the leadership of the association.

There is no universal threshold that should trigger a foreclosure. The decision should be based on many factors, including the amount of the debt, the financial health of the association, the reason for the debt, and the homeowner’s willingness and ability to bring the account up to date. The magnitude of this decision requires an approach that is fair, reasonable, and consistent with practices and procedures established by the association’s governing documents.

While there are isolated instances of inappropriate foreclosure, this action is viewed as a last and unavoidable step by the overwhelming majority of community associations. Knowing that people occasionally face financial hardship—a lost job, for instance—many community associations do work with homeowners to develop deferred or special payment plans.

Elected by their neighbors, volunteer community leaders are responsible for ensuring financial stability and the continued delivery of services to residents in the community. An association’s budgetary obligations do not change when assessments aren’t paid. Common areas must still be maintained. Garbage must be collected. Insurance coverage must continue. The pool remains open in the summer. Snow is plowed in the winter.

Homeowners who simply refuse to pay their assessments—as they contractually agreed to do when they purchased their homes in an association—are cheating their neighbors, their community, and themselves. When homeowners are delinquent on their assessments, either their neighbors must make up the difference or services and amenities must be curtailed. That affects everyone in the community, perhaps even leading to a decline in property values.

Used as a last resort, the lien and foreclosure process gives community associations a mechanism to ensure the resources necessary to provide services, protect property values, and meet the expectations of the community as a whole. Placing a lien on property, with the ability to foreclose, is typically enough impetus to get delinquent residents to meet their financial obligations to the community.

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