7 Budget Blunders: Are They Costing Your Texas Association?
As a board member of your Texas association, your community’s needs and residents' expectations are always top of mind. However, before you dive into outlining your community's financial steps this budget season, it's important to consider the mistakes that can derail even the most carefully planned budgets. To help you fulfill your fiduciary duty to your association, we’ve put together seven common, costly mistakes we've seen too often among Texas associations. The good news: they're all avoidable.
By being aware of these 7 biggest blunders and taking the necessary precautions, you can work collaboratively with residents to ensure a healthy financial future for your whole community.
Not using the reserve study as a roadmap.
What is a reserve study?
Usually performed by a third-party professional (like an engineer), a reserve study for homeowner associations (HOAs) or condo owner associations (COAs) is a formal evaluation of your Texas association’s property and serves as a critical, strategic budgeting tool for your board. A reserve study helps determine how much your HOA or COA needs in its reserve fund, or cash that is designated for irregular, yet predictable, future expenses. Reserve studies are especially important for COAs that share common walls, spaces, elevators, HVAC, plumbing, etc.
What can HOA reserve funds be used for?
A HOA or COA’s reserve fund is designated to cover the repairs or replacement of existing components or assets, like asphalt streets, pools, clubhouse roofs, or community fences. However, it's crucial to note that reserve funds cannot be used to create something new, such as building a playground from scratch.
The purpose of HOA reserves is to ensure the financial stability of your association by preparing for future expenditures.
Remember: reserve funds should not be used for regular maintenance or general savings. They are specifically allocated for existing reserve components, not capital improvements or routine maintenance.
How often should my association have a reserve study?
For Texas associations, whether it’s time to update a reserve study or conduct a new one depends on a few factors:
How long ago was your last full reserve study performed?
Any new major repairs?
Added any assets since then?
Has your property been affected by any severe weather or water-related events?
Since “there is no statutory requirement to conduct a reserve study and no statutory requirement to fund reserves” in Texas, a good rule of thumb for your HOA or COA is to update its reserve study every three to five years. This also takes into consideration that costs for materials and labor tend to change annually depending on inflation.
What is the point of a reserve study?
A reserve study provides a budget roadmap that helps your board manage cash reserves for non-annual, expected, and predictable expenses. In other words, a reserve study informs your funding plan, which is essential for short and long-term budgeting. No matter the age of your HOA or COA – three years, 30 years, or fresh off the developer’s hands – its board members have the fiduciary duty to carefully manage reserve funds. Fully funded reserves protect homeowners from dreaded, costly special assessments due to unexpected expenses.
Note: According to reserve specialists, reserves that are funded at 70% or above are typically not in danger of a special assessment.
Aren’t reserve studies really expensive?
Every asset has a lifespan and will eventually require repairs or replacements. A reserve study is crucial as it helps you properly fund your reserves to cover those expenses. Without adequate funding, your association might have to charge a special assessment to all owners or secure funds through a loan.
These studies project replacement costs over a span of 20 to 30 years, giving your association ample time to plan for future expenses. Opting not to have a well-funded reserve account will always end up being more expensive.
When it comes to reserve studies, the size of your community and the level of analysis you need may affect the overall cost, but don't let that discourage you from completing a reserve study.
Not sure when your association had its last reserve study?
A seasoned management company should have access to a depth of resources and expertise, as well as preferred vendors, who can work as your board’s trusted partner to keep your HOA or COA in top notch condition, physically and financially.
Not being transparent with residents.
This is a good transition to talk about raising dues in your Texas HOA or COA. Let’s face it - no one likes surprise bills. But let’s say your budget committee carefully weighed all the options for cost-saving opportunities, reviewed current vendor contracts, considered ways to generate income, and determined your association still needs to raise dues. How do you communicate this to residents the right way?
Transparency as a board member not only gives you a solid foundation but also builds trust between you and your community. Here are a few tips for transparent communication about raising dues:
Smaller, regular increases are easier on homeowners (financially and emotionally) rather than an unexpected hike.
Regularly communicate with residents about the association’s financial situation so they understand how much things cost.
Outline how dues are used for residents; be upfront about the increase, explaining how dues pay for daily expenses and community maintenance.
Inform residents early about the topic – most understand your association is not trying to spend funds on things it doesn’t need. If informed early on, residents won’t be as surprised by an increase.
Provide residents with several notices at least 30 days in advance – don’t expect one notice to stick. Use email, flyers, newsletters, community website, and board meetings as tools to inform residents.
Make it a habit to ask residents for feedback and incorporate it when you can.
Of course, a board’s duty to residents is safeguarding property values, and membership dues are a smart investment in this endeavor. Working with a solid property management company will enable you to discover practical cost-cutting strategies and explore opportunities to boost revenue. Moreover, they have plenty of experience effectively communicating any necessary increases to residents.
Not keeping it local.
For any HOA or COA, it's vital to know the people with whom you do business. But it's equally important to trust the vendors who maintain your amenities and landscaping. How you spend your association’s money (and with whom) matters, just as much as how you budget it.
When it comes to Texas associations, your community's business relationships should feel personal and natural. For instance, if a management company handles your community, they should have an extensive network of resources, numerous vendor partnerships, and established relationships. These connections allow your association to receive high-quality services at competitive or even below-market prices.
Moreover, word-of-mouth remains a powerful marketing tool if you're considering a property management partnership. Though building and maintaining vendor relationships through grassroots efforts take more time, the benefits are immense. As a community leader, staying connected with homeowners and establishing strong ties with local businesses is essential.
Not reevaluating fixed expenses.
You've built relationships with local businesses or relied on your property management company to connect you with top-notch vendors, marketing tools, and maintenance services. These partnerships ensure your community runs like a well-oiled machine.
But here's the thing – don't assume the costs for these services will never change. As your board evolves year after year, new challenges arise, and so do your needs. This means more meetings, more planning, and yes, more money.
It’s also worth noting that vendors are expanding their offerings to cater to their growing clientele. And with that growth comes a different business model, sometimes with higher rates.
So, in your budget planning, it's crucial to account for the normal inflation of prices. If you have a property management company, rely on their experts for updates and personalized recommendations that align with your Texas HOA budget and, most importantly, your community's needs. Take the time to reach out to your trusted vendors and request a detailed price list. It's also wise to review your vendors annually or explore other bids for similar work, just to see if there are more cost-effective options out there.
Excluding special assessments.If you’re used to keeping an eye on community equipment, you’re probably familiar with its shelf life. When it's almost time to replace that equipment, it's important to be aware of the replacement cost, communicate with residents about why it's necessary, and emphasize the value it brings to their lifestyles. As stated earlier, no one likes surprises, so make sure you explain that a special assessment might be needed if it's unexpected.
Remember: Emergencies are not the time for special assessments – that's what good budget planning and increased HOA or COA dues are for. When you send out notices to residents, be crystal clear about the difference between the two, so everyone is on the same page.
For a deeper dive on this, check out our three-part series on how to handle special assessments:
Part 1: Pay, Borrow, Assess
Part 2: Underfunded HOA Reserves
Part 3: Fund Your Capital Improvement
Not updating insurance.Take a moment to reflect on any challenges your association has faced within the past year. Are there any insurance coverages you wish you had? Whether it's protecting against weather events or unexpected expenses, let's explore ways to ensure your community has the right coverage.
Once you identify the common insurance needs of your association, it's time to consider comprehensive coverage packages that safeguard you against hidden dangers. When it comes to navigating the recent economic shifts, things are certainly different now. We need to outline your coverage as the first step towards protecting your community.
Start by reviewing these coverages with trusted advisors who can highlight their value, acting as your security blankets. Remember, it's always better to be safe than sorry, right? As community leaders, we want you to fully understand the advantages of each policy and how it strengthens your association’s entire budget.
For Texas HOA or COA board members partnering with a property management company, tap into their resources and leverage their purchasing power. This way, you can secure the best rates for the right coverage.
Not keeping good records.The art of thorough record keeping sounds easier than it actually is. However, partnering with a reliable property management company also means more financial resources, expert CPAs, and standard operating procedures to ensure accurate recordkeeping. You'll have clear access to financial reports, which is crucial in demonstrating how homeowners' money is being spent and maintaining budget transparency.
Working with property management partners who offer top-notch accounting services will provide you with insights into how your association's funds are allocated for community maintenance. Plus, having accurate records is vital not only for handling financial hiccups in the future but also for comparing budget line items with official financial reports.
Now, we all know that HOA and COA budget blunders can sometimes feel unavoidable, but guess what? They often aren't! Just make sure to keep these 7 guidelines in the driver's seat as you fulfill your fiduciary responsibility as a board member.
Preparing your association's annual budget can be quite a challenge, but fear not! With the right resources and information, you can ensure the long-term financial well-being of both your association and community.
FirstService Residential is simplifying property management.Our FirstService Residential Texas family enjoys peace of mind knowing they’re in good hands. They can count on our 24/7 customer service for tailored solutions that take the balancing act out of property management. And our service-first philosophy means we don’t stop until what’s complicated becomes uncomplicated. To make life, simplified.
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