Part of an HOA? Here’s What You Should Know About That Yearly Budget

If your home is part of a homeowners association (HOA), you probably already know that the yearly budget is something every HOA member is concerned about and has an opinion on. After all, those HOA budget guidelines not only determine whether or not your neighborhood will be getting any kind of upgrades or needed maintenance in the coming year, but also what the cost will be to the people paying those HOA fees — namely you, the homeowner!

If you’re new to the world of HOAs, you also might be wondering just what those monthly fees you’re required to pay will cover, why some communities have higher HOA fees than others, and whether or not you can expect your own monthly fees to go up.

We’ve talked to experienced real estate agents and attorneys who specialize in HOA law to gain insight into how those monthly fees are determined, what a yearly HOA budget involves, and what you, as a homeowner, should know about HOA budget guidelines.

What is an HOA, and what does one do?

While a homeowners association might initially make you think of condominiums or townhomes, they are actually common in all kinds of residential communities. In the U.S., there are more than 370,000 HOAs, which represents over 53% of owner-occupied households.

HOAs are there to enforce regulations around what you can and can’t do with your property, otherwise known as the covenants, conditions, and restrictions (CC&Rs) of a subdivision, as well as managing and maintaining certain expenses for that subdivision. HOA fees are usually collected either monthly, or sometimes quarterly, and they can cover items like landscaping in common areas, security, trash pickup, or amenities such as community pools and gyms.

Florida agent Carrie Routt, who works with 75% more single family homes than the average agent in her area, says that while buyers might balk at what can seem like excessive HOA fees, the fees can sometimes almost pay for themselves. “Especially for an expense like exterior insurance,” she says. “That could run between $8,000 and $9,000 a year for a house.”

What goes into an HOA budget?

Attorney Bruce Flammey, who specializes in HOA law and also has extensive experience as a community association manager, says that the HOA budget is basically created as a savings account to cover specific categories of expenses for the association.

The money that is collected over the year includes HOA dues and any interest that accrues. According to Flammey, the goal is to have neither a surplus nor a deficit by the end of the year. “This is a zero-based budget,” he says. “It isn’t designed to have a profit and loss.”

Expenses may include:

• Administrative expenses such as bank charges, legal fees, office maintenance, account management fees, or newsletter costs
• Taxes and insurance
• Ongoing operating expenses for subdivision maintenance, utility fees, landscaping, street cleaning, trash removal, and so on

When an HOA doesn’t factor expenses correctly, the reserves can end up underfunded, and the HOA committee may require that members pay a special assessment — which, as one would expect, is a highly unpopular move, and something most HOAs try to avoid.

How HOA budgets are built

In order to correctly build a budget that won’t result in underfunding or special assessments, HOA committees usually start looking at their ledgers several months before the year ends.

“They should start working on this at least by August or September,” says Flammey. He notes that in the state of Nevada, where he lives, the board of directors for HOAs must meet and agree on new assessments 60 days before they are implemented.

The HOA committee takes several steps to figure out the next year’s budget.

Organize their team

The HOA board will usually designate a dedicated committee to research upcoming maintenance issues, changes in ongoing expenses, and any other potential changes to the budget. This committee will then present their findings and recommendations to the board.

Review budgets from past years

In order to best determine what will be needed for the upcoming year, the HOA committee will look at previous years’ budgets – preferably the past three years or so. This way, they’ll be able to see what kind of unexpected costs came up, how much was actually spent on various items, how much costs have increased over that three-year period, and whether or not they can anticipate prices to increase more in the coming year.

It’s also good to work backward here, and rather than trying to figure out how much money will be generated by monthly fees, the committee should look at how much money will be needed to continue to operate the HOA, then set the fees accordingly.

Reserves

HOAs are responsible for maintaining a reserve fund for emergencies and unexpected repairs. Each year, they must review these reserves and see if there are sufficient funds to cover any issues that might arise.

“This is the association’s account to cover expenses when long-lived items go bad,” says Flammey.

“For example: private streets in a gated community. The replacement costs of long-term items like that must be considered, and money has to be put aside for future maintenance.”

If the HOA isn’t sure that the reserve fund will adequately cover potential emergency repairs, they may need to commission a reserve study. Some states actually require a reserve study to be executed at least every three years, in order to make sure the HOA is in compliance with their reserves.

A healthy reserve account means a healthy HOA, and Routt cautions anyone who is buying a home that includes an HOA to be mindful of the reserves and what they cover. Reserve funds may or may not include certain maintenance items, such as roof repairs on community buildings, and Routt says homeowners should be sure to ask for specifics.

Figure out new budget items and needs vs. wants

Is the community pool in dire need of resurfacing? Or are HOA members interested in funding a new communal space, like a park or gym? All of these things must be taken into consideration when calculating the budget, and then prioritized according to urgency.

The committee should also take a far-sighted approach in estimating new budget items, and should review future goals alongside future possible expenses. “One component of the budget is making sure they have the bulk of funds on hand when items need to be replaced,” says Flammey.

Contact vendors for estimates on both new and ongoing budget items

As part of preparing the budget, the HOA should send out requests for proposals (RFPs) to potential vendors for items that need to be replaced or repaired. This will provide a few different bids to choose from, and the committee will have a better idea of costs.

Flammey suggests that HOAs also contact local utility companies to see if there are any anticipated increases for the next year.

“They should look at year-to-date expenses for that same area and see how much has been spent to date,” he says. “In the budget process, there are often increases in costs for things like electricity, especially when you get into the fall months.”

See if there is room to cut costs

An HOA budget can be trimmed in some of the same ways you might trim costs in your own home.

Can watering schedules be set to reduce costs of water usage, or can regular street lights be replaced with solar lights? Are there any items in need of repair that, if taken care of now, might help to avoid a costlier replacement later? Should big-ticket upgrades be temporarily shelved in order to take care of more immediate costs?

The committee should review all possible ways to keep fees from excessively increasing.

Determine monthly fees to homeowners

Once the HOA has researched new costs for the year, reviewed reserves, and assessed what expenses will need to be covered, they will be able to establish that year’s monthly or quarterly fee for the homeowners.

Flammey notes that while homeowners have the right to question increases in fees, they need to be prepared for the possibility of paying more. This is especially true for newer developments.

He explains that when a new development goes in and an HOA is created, developers might initially charge fairly low HOA fees in order to bring in buyers. If their budget ends up running short, they may end up creating a loan between the developer and the association if they aren’t able to cover the difference. This could mean higher fees down the road.

“Costs of things such as supply costs for repairs can go up,” he says. “Money [the HOA] thought they had in reserve might get burned up by these kinds of expenses.”

Leave room for delinquency

While everyone in an HOA community is supposed to pay their monthly dues, unfortunately, not everyone does. “The reality is, not everyone pays,” says Flammey.

Having some wiggle room is important for the overall budget. If it’s too tight, with down-to-the-penny expenses and expected income, the HOA could be in trouble the minute someone pays their dues late (or doesn’t pay at all!).

Depending on the regulations of the CC&Rs, homeowners who fall behind could be charged late fees and interest on the outstanding amounts. Some states even allow HOAs to place a lien against your home for past-due fees.

Routt says that homeowners who are selling their home will also be subject to an estoppel letter, otherwise known as an HOA letter. This letter documents any outstanding monies owed to the HOA by the homeowner, and in addition to any late fees or interest that may have accrued, the HOA charges a fee to issue the letter. “It can be a sore subject because sometimes they charge $300 to $400,” she explains.

Final approval

Once the committee is in agreement on the budget, it’s time to take it to the board and talk to homeowners. The committee may need to defend its budget against those board members who take issue with a large increase in dues, and may potentially have to adjust the budget if they cannot get everyone to agree.

What the HOA budget means for you as a homeowner

When you buy a home that is part of an HOA, you’ll want to make sure you fully understand what that yearly HOA budget includes, what your HOA fees cover, and realize that those fees could (and probably will) go up over the years.

“A prospective buyer needs to look at what the annual HOA budget is, and look at previous years,” says Flammey. “The buyer can also look at the reserve fund and see how much money is in it for long-lived items, as well as the reserve study to see if there are adequate funds for certain repairs.”

Flammey also suggests that prospective buyers ask about the last time fees were raised, in order to better predict future increases. Adds Routt, “It’s very common for an annual increase, even if it’s just a small percentage. The fees are never going to go down — only up.”

Living in a neighborhood with an HOA carries both positives and negatives, and when you buy a house that is part of one, you’ll not only want to make sure your lifestyle can accommodate everything that goes with it; you’ll also want to make sure that the HOA’s budget and financials are in order and well-managed. A reputable agent can make navigating the ins and outs of HOAs more manageable, and you’ll be able to enjoy all the perks of HOA community living without any added stress!

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