Tis The Time For Creating a New Annual Budget for Your HOA

This article will discuss the following
  • What factors that should be considered in the preparation of an annual budget
  • Checking the accuracy of your association’s prior reserve study
  • Income and expenses realized by the association with regards to accurate financial statements
  • Adjustments to the amounts spent for the known increases that are going to be required for the next year
  • Projecting accurate legal expenses to avoid future special assessments
  • Creating and maintaining an accurate budget for an association’s annual income and expenses

Each New Year brings on new challenges and responsibilities for homeowners association boards of directors. One of the most important annual functions is the adoption of a budget for the association’s projected income and expenses during the next year. Creating a realistic budget is a difficult task for many associations and, as a result, the annual budget is either not created at all, or the most recent last budget is merely copied with a few tweaks here and there. The careless preparation of an association’s annual budget will ultimately lead to operating problems, the need for the dreaded “special assessments,” and internal conflicts between board members and/or homeowners.

The are many factors that should be considered in the preparation of an annual budget. While the history of past expenses is important to know, it also critical to have a clear understanding of the physical components that make up the association’s common area that must be properly maintained. Such an understanding necessitates knowledge of what the physical components actually consist of, the expected term of each component’s life, the cost of repairs and replacements of that component, and how much time is left before the component must be replaced. In order to properly take all this information into consideration association boards should have an accurate “reserve study.” Reserve studies are reports that are prepared by qualified professionals who inspect the association’s property and provide all of the necessary information that is required to know the extent of funds that are required to be collected from owners each year in order to maintain sufficient reserves for funding the repairs and replacements of the various physical components as they age and begin to deteriorate and break down. Associations that maintain sufficient levels of reserves have less operating problems than those that do not, tend to be better maintained and are generally more valuable on resale. If your association does not have an up-to-date reserve study, bite the bullet and get one prepared.

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