Being part of an HOA board is a job that comes with a lot of difficult responsibilities. When it comes to the financial side of an HOA, there are so many moving parts that it can get overwhelming. Avoiding these six HOA financial mistakes can help protect your community from getting into a difficult position financially.
HOA Financial Mistakes to Avoid
A quick way to see whether an HOA is in good condition is to check its financials. More often than not, an HOA’s financials reflect how it is run. However, as with other aspects of community management, mistakes are bound to happen. While some mistakes are excusable, others are more destructive. Here are some of the worst HOA financial mistakes you can commit and how they can affect your community.
1. Not Budgeting Thoroughly
The budget is one of the most important tools for the health and success of your community’s finances. It sets the tone for the entire year’s financials and gives you a picture of where your money needs to go. When prepared properly, a budget can single-handedly bring finances under your control.
One of the biggest financial mistakes for HOAs is improper budgeting. If you become lazy with your HOA’s budgeting, you will quickly find the association in financial ruin.
To avoid this mistake, be sure to account for every expense that you can think of. It’s a good idea to sit down with your HOA board and discuss the coming year’s expected expenditures. Leave no stone unturned. Be especially sure to set aside funds for unanticipated expenses. It’s best to allocate a budget for this type of expense now than to surprise your members with special assessments later on.
However, this doesn’t mean you can just include anything and everything in your budget. Charging your members a higher assessment for something your HOA doesn’t need would be irresponsible. When in doubt, stick to the common sense rule: if you cannot afford it, do not buy it.
2. Not Getting Insurance
Many associations deem insurance coverages a wasteful or unnecessary expense. However, forgoing insurance for your HOA is one of the most foolish HOA financial mistakes you can make as a board member.
Insurance exists for a reason, and it would greatly benefit an HOA to take out a policy in case of unforeseen circumstances.
Think of an insurance policy as an investment. It covers your HOA financially in case of calamity or other incidentals. If an earthquake strikes and damages common areas, you can avoid taking a large chunk out of your budget or reserve to cover the cost of repair. Without insurance, you may run out of money or be forced to ask members for more.
Planning ahead is crucial to keeping your HOA above water and out of financial disaster. As a leader in your community, it is your responsibility to acknowledge that the unexpected can happen. And, when it does, you need to be prepared. Plan ahead and research the type of insurance that is right for you.
3. Not Shopping Locally
One of the most unexpected HOA board financial mistakes is failing to shop locally. While it may sound absurd at first, the reasoning behind it makes total sense.
By not shopping locally, you may be wasting valuable resources and spending unnecessary money on travel expenses even if the costs are hidden in the bill. By shopping locally, you can develop close relationships that can result in higher quality work on the part of your vendors and discounts given to loyal customers. Avoid the temptation of looking further than your own neighborhood for good business relationships.
4. Not Being Realistic
Optimism is an excellent quality when it comes to many aspects of your HOA community. However, when it comes to your finances, pessimism will serve you far better.
Don’t think that everything will go well “if you just believe it will.” That kind of reasoning only works when you’re a cartoon character. One of the top mistakes that HOA boards must avoid when it comes to their finances is not being realistic about how much things are going to cost or how long purchases are going to last.
Being overly positive about your finances can land your HOA in serious trouble. For instance, you may underestimate the cost of maintenance, resulting in a lack of funds when the time calls for it. When in doubt, it is far better to budget too much than to try and scramble for extra funds.
5. Cutting Financial Corners
Cutting financial corners in property upkeep and maintenance may seem like a good idea at first. After all, you are saving money by using that cheaper material or hiring a cheaper vendor. However, this road can end in disaster.
When it comes to crucial things like roof repair, a cheap job can result in property damage and more repairs — and costs — later. Instead, invest in high-quality maintenance that will last for years and resist wear and tear.
You must also take inflation into account. Every year, the prices of goods and services go up. While refusing to increase assessments will put you in the homeowners’ good graces, it may lead to more trouble down the line when you go back and ask them for more money.
6. Not Keeping Accurate Financial Records
Failure to faithfully and accurately record an HOA’s financial comings and goings is one of the most critical HOA financial mistakes you can commit.
A good HOA board diligently records all financial transactions using the best accounting method. Accurate and consistent bookkeeping allows you to keep track of where the HOA’s funds are going.
Moreover, one of the board’s responsibilities is to be financially transparent towards members of the community.
In line with this, you must also compare all financial reports after they are prepared. See to it that accounts are balanced and every penny is accounted for. Discrepancies can arise due to human error, but they can also be a sign of something more sinister. By working hard to keep accurate records, you can avoid inconsistencies.
Be Wary of These HOA Financial Mistakes
Avoiding these six HOA financial mistakes is important to the health of your association. You must stay aware and be careful not to commit any of them. Even just one could damage the financial standing of your HOA. While awareness is the first step, staying vigilant and performing your duties to the best of your abilities is equally critical. This will keep your community thriving for years to come.
Remember that an HOA management company can always assist with the financial side of your community if you are having difficulties. Don’t hesitate to reach out to us if the need arises.
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