Rightsizing HOA Dues: Questions Homeowners Should Consider

There is something uniquely attractive about living in a homeowners association. Millions of people are drawn to the lifestyle because it allows them to be part of a local community, access exciting amenities, and enjoy worry-free maintenance. The fact that there are more than 355,000 HOAs across the country is a strong indicator of the popularity of the HOA life.

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Source: cidanalytics.com

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However, it's not all sunshine and rainbows, as many on the internet very vocally attest to on discussion forums like NextDoor, Facebook and Reddit. As volunteer-run non-profit operations, HOAs can be difficult to handle financially. The question on every resident's mind seems to be: is my money being spent well? It's important for board members and management companies alike to take their fiduciary duty seriously. They should constantly evaluate the community spending to ensure that HOA dues are priced correctly (and that won't always mean cutting costs and lowering monthly dues!)

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What are the Dues Truly Funding?

Too often, homeowners pressure HOA boards to keep dues low. While that may sound good on the surface, maintaining dues payments at a consistently low level is playing a very dangerous game. Similar to driving a car with the check oil light flashing, the driver will undoubtedly avoid spending money in the short term. But failing to spend is not the same as saving. When the engine ultimately fails and needs a significant repair, the cost avoided is almost always far less than the cost finally spent.

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HOA dues work the same.

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When working to rightsize your HOAs monthly assessments, analyzing two spend types will be crucial in determining whether or not your dues are enough.

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Short-Term Budgeting

An HOA's short-term budget should account for the tactical or operational part of an HOA's annual budget. This part of the budget covers the ongoing services the community pays for, like landscaping, amenity maintenance, pest control, and trash services.

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Unfortunately, HOAs frequently overpay for services due to a lack of oversight. Maybe a long-term vendor relationship has caused over-inflated prices, or a prior board signed the first vendor they found instead of looking for the best deal. Maybe the competitive environment has simply changed. Regardless of the reason, not all costs are justified, and keeping a close eye on the operational expenses that facilitate community success is important to accurately adjust HOA dues year over year.

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Long-Term Budgeting

The annual budget's long-term planning component, also known as a strategic plan, can be more complicated and is often discounted. When planning long-term expenditures, boards must first take inventory of the community's essential assets. They then need to assess the amount and possible timing of these assets' repairs, maintenance, and/or replacement while accounting for unexpected expenses that may derail long term plans. It's a lot of work and takes no small amount of skill to do so successfully.

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Boards should estimate and account for these future expenditures in the savings accounts designated for this explicit purpose: the Reserve Fund. To get an accurate estimate of these likely expenses, an HOA must have what's called a “reserve study” conducted.

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Does my Association Maintain a Reserve Study?

Because community association board members are all volunteer homeowners, chances are very few understand engineering, construction, HOA law, and HOA-specific accounting. Yet, many of the far-reaching decisions HOA boards make will need some level of expertise to be successful.

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To ensure board members are doing what's best for their community, they should engage experts who can advise them on issues relevant to the needs of their community–but remember, that costs money. This is an area where rightsizing could go in the “increase dues” direction, and it's important to think back to the check engine light analogy–paying a little more now should be the decision, as long as it's working to ensure your residents aren't fitting a massive bill later.

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Long-term financial planning for an HOA is best achieved through a reserve study. These reports list the community components within your HOA and assess each asset's anticipated useful life, remaining useful life, and replacement costs. A reserve study can be used to develop a multi-year plan for the annual funding requirements of the reserve accounts. Deposits into these accounts are based on projected future costs and the timing of when they are likely to occur.

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Are Future Reserve Balances Appropriate?

Back to the burning question your homeowners are no doubt pressuring you with: is my money being well spent?

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Too many boards feel forced to sacrifice appropriate dues increases to appease frustrated homeowners. But by ignoring or downplaying reserve funding to keep dues low, these lower dues are creating long-term peril for the entire community. The longer a community board neglects sufficiently funding their needs, the further behind the 8-ball the association ends up, and playing financial catch-up is nearly impossible.

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Too often, deficiencies in reserve funds are not discovered in time to avoid high costs being passed on to residents. The choice most boards tend to make is to delay important repairs in favor of moderate increases to monthly assessments. But deferring maintenance or repair projects can depress property values and can pose serious threats to the community, especially in multi-story condominiums.

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Ensuring that your reserve study is up-to-date and that any long-term plan created from that study is being routinely updated to reflect changes in costs of goods and services, inflation rate fluctuations, and product availability is a major step in the right direction when you begin to rightsize your HOA dues.

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Rightsize With an HOA Loan

If your HOA dues and reserves aren't where they ought to be, and your community needs additional capital improvement funding fast, consider an alternative to the dreaded special assessments: an HOA loan. Instead of worrying about the negative reactions your neighbors will have when you ask to double or triple their monthly dues, or the steep ramifications of unpaid assessments in a critical improvement timeline, consider acquiring an HOA loan to fund your community's long-term budgeting needs. With a fixed and constant loan payment, your HOA dues can be adjusted at a more reasonable rate, thus avoiding overburdening homeowners without letting your community fall into disrepair.

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Contact us today to learn how an HOA loan can help to easily rightsize your HOA's dues.