Condo and HOA Budgets: Financial Planning for Associations

One of the most important responsibilities of an HOA or condominium community board member is managing the finances of the association. Most association board members are volunteers with varying backgrounds and do not necessarily have prior financial experience. That can make creating budgets a challenge. Creating an effective budget ensures the community is well maintained, financially healthy, and compliant with legal regulations.

The purpose of this blog is to provide you with a step-by-step guide on executing a successful financial plan, best practices, and pitfalls to avoid.

What is an HOA Budget, and Why Does it Matter?

An HOA budget is the financial plan that outlines the projected income, typically from dues and assessments, and expenses, like costs related to maintenance, services, utilities, or insurance. The budget serves as the roadmap for the board to be able to make informed decisions regarding the community’s financial health and future goals.

When boards neglect budgeting or when costs are underestimated, communities can face deferred maintenance, additional fees, or other shortfalls that can harm property values and resident happiness.

How to Create an HOA Budget

Create a Budget Committee

Establishing a designated team to develop the HOA budget can help make the process a lot easier. The committee should be comprised of the board president, treasurer, community manger, and any residents that may have finance experience. It’s also a great idea to work with an external advisor, like a CPA, that can provide expert guidance in long-term planning, analysis of reserve funds, and accurate tax planning.

Schedule a Separate Budget-Planning Session

Plan one or more meetings solely focused on the budget process. These should ideally be held at least 90 days before your fiscal year begins, giving ample time for thoughtful review and community input.

Gather Financial Data

Once your team is set and you have meetings scheduled, it’s important that everyone understands the current state of the association’s financial health. Analyze past budgets, financial statements, and fund balances from at least the last two years. This ensures you understand previous income, expenses, and potential problem areas.

Outline Community Goals

Make a list of the projects that the community aims to accomplish in the next one, three, and five years. This will include necessities that need to be addressed in the short term, like repairs and safety improvements, as well as items that may take a few years to save up for, like new or updated amenities. Be sure to prioritize the needs over the wants.

Estimate Expenses

Gather quotes from vendors and service providers for landscaping, repairs, utilities, insurance, and other operational costs. Account for inflation and any anticipated increases, such as rising labor or utility rates. These estimations can help determine what operations or projects can happen in the upcoming year versus what might have to wait a bit.

Allocate Reserve Funds

A reserve fund is money set aside for major future repairs and replacements, such as roof work, paving of roads and sidewalks, or upgrades to mechanical systems. To determine how much to allocate, boards should conduct a reserve study with a specialist to evaluate the condition and lifespan of the community assets. The findings help guide how much should be contributed to the reserve account each year, ensuring the community can cover large expenses without relying on operational costs.

Calculate Assessment Fees

Once expenses and reserve contributions are estimated, the board must determine how much to collect from residents in assessment fees. This amount should cover the full cost of operations and reserves while staying in line with the HOA’s governing documents. Boards should also consider factors like the financial capacity of the residents and any limits on increases set by state law or community bylaws. Transparent and reasonable assessments help ensure the budget is balanced and supported by the community.

Create, Review, Adjust

Present the preliminary budget to the board and homeowners for feedback. Be transparent about assumptions and be willing to make adjustments. A study from Rocket Mortgage in 2024 found that 57% of people who live under HOAs say they don’t like it. Stats like this make communicating clearly all the more important to build trust and collaboration.

Approval and Distribution

Once the annual budget report draft is ready, it must go through formal approval processes.

• Board Approval: The board of directors review and vote to approve the budget, often after homeowner input.
• Homeowner Notification: Most states require the association to notify members of the budget and any proposed assessment increases ahead of time, along with offering opportunities for discussion and homeowner input.
• Distribution: The final approved budget should be distributed to all homeowners via mail, email, or posted on a community website/portal.
• Transparency: Explaining key budget components in plain language helps reduce disputes and enhance community agreement.

Communicating clearly about how funds will be used fosters trust from residents.

Legal Compliance and Regulatory Considerations

HOAs and condo associations must abide by various local, state, and federal regulations that affect how their budgets are created, approved, and implemented.

• Each state has specific legal requirements around budget disclosures, homeowner notices, voting procedures, and fee increases.
• Most states require written notice of budget meetings and fee changes within a certain time frame.
• Associations still need to file taxes. With a few different routes that can be taken, tax professionals’ help can ensure penalties are avoided.
• Recording keeping, audits, and disclosures are often mandated to protect members’ interests.

Consulting a CPA who understands community association compliance issues can help your board avoid costly oversights.

Pitfalls to Avoid When Creating Your Budget

• Underfunding the Reserve Account: Failing to contribute to reserves can lead to large special assessments when unexpected repairs arise.
• Overestimating Revenue: Counting on delinquent dues (late fees or interest charges) being paid or new revenue streams that aren’t guaranteed can quickly create budgeting issues.
• Ignoring Historical Trends: Not analyzing previous years’ expenses can result in underestimating recurring costs or missing seasonal patterns.
• Not Accounting for Inflation: Overlooking rising costs for services like insurance, utilities, or landscaping may result in budget gaps.
• Skipping Professional Advice: Without input from a CPA or reserve study specialist, boards may miss important tax implications or funding risks.
• Poor Communication with Homeowners: Surprising residents with sudden increases in assessments or special fees due to unclear budgeting can lead to dissatisfaction and resistance.
• Non-Compliance with State Laws or Governing Documents: Budget processes that violate HOA bylaws or state-mandated notice periods can result in legal challenges or penalties.

HOA Best Practices

• Start Early: Begin budget planning months before the new fiscal year.
• Engage Residents: Use surveys and meetings to collect homeowner input. The budget should reflect the needs and priorities of everyone, not just those on the board.
• Work with Professionals: Involve property managers, accountants, and reserve study specialists for guidance and to get any questions answered.
• Communicate Transparently: Provide transparency with regular updates, Q&A sessions, and clearly communicate changes in dues or spending.
• Review Contracts Annually: Check vendor and service agreements to renegotiate terms or identify cost-saving opportunities
• Prioritize Needs: Focus on safety and mandatory maintenance first.
• Document Assumptions and Decisions: Keep detailed records of why certain decisions were made to support future audits or board transitions.

These steps foster financial stability and resident satisfaction.

Streamline the Budget Process with C&A

A well-planned and transparent HOA or condominium budget is essential for maintaining your community’s financial health and ensuring that both day-to-day operations and long-term projects stay on track. Through this process and with expert guidance and community input, board members can manage risks, avoid unnecessary fees, and support lasting property value.

Working with a CPA firm that has specific experience in working with community, homeowners, and condo associations, like Cukierski & Associates LLC, can make the budgeting process far more accurate, efficient, and easier to understand.

Whether you’re creating your first budget or refining your current approach, contact the team at Cukierski & Associates for guidance every step of the way.