A question that comes up from the HOA membership especially around budget time is “Why are we paying more per month than ____(fill in the blank) HOA? They only pay $____(fill in the blank) a month.”
While this seems like a reasonable question, this is what's called an “apples and oranges” issue. Comparing one HOA's monthly assessment to another's is meaningless without knowing what is actually being paid for. The person that poses this question to the Board never seems to have the details, only the bottom line. In those cases, it's reasonable to respond that the answer requires reviewing the other HOA's actual budget. Ask them to get a copy and the Board will consider it during the annual budget process.
There are a variety of factors that can account for differences in assessment levels including:
- Age of Property. The older it is, the more expensive it is to maintain.
- Number and Type of Amenities. A pool alone can increase the annual budget 20%.
- Reserve Funding. Proper reserve funding requires setting aside 20-40% of the monthly assessment. An actual Reserve Study will reveal the proper funding level. How is your HOA doing on this critical planning?
There are some things the Board should scrutinize during the annual budget process. Past year's expenses should be detailed in a way that trends can be determined. Things like painting, electrical, plumbing, roofing, siding, deck and fencing repairs should be assigned unique categories rather than lumping them into “Repairs-General”. Then, if a particular kind of repair cost is significantly higher than expected, an intelligent decision can be made on how to handle it next year. For example, if broken pipes have significantly increased due to deterioration in similar locations, it's time to consider doing major proactive plumbing repair rather than waiting for the next flood.
Large service contracts like landscaping, property management, pool maintenance and janitorial should be competitively bid each year. Even if you are totally satisfied with the service received and have no intention of changing provider, it will demonstrate to the membership that the Board is practicing due diligence and good stewardship. Also, if a particular service provider is maneuvering for a contract increase, a competitive proposal will work to the HOA's advantage in negotiating or verifying that your current provider is entirely justified in the increase. NOTE: Never change major service providers without major cause. Working with an HOA and its members is not easy and the learning curve is very involved. The HOA is usually much better served correcting deficiencies with the current provider rather than starting with a new company that is bound to have its set of own shortfalls.
Some other points to examine: Are there unnecessary services being paid for?
- Management usually charges extra for preparing unit sale information for sellers, buyers and lenders. Is the HOA paying for it? If so, why? It has nothing to do with managing the HOA. This cost should be passed on.
- That pool or spa may be used by only a hand full of residents and cost up to 20% of the annual budget. If an appropriate majority can legally approve shutting it down, major money could be saved.
- Has exterior lighting been converted to low watt/high lumen compact fluorescent bulbs which usually pay for themselves in a year?
- Is the Board actively supervising management by reviewing regular financial statements and approving all unbudgeted expenditures?
Make sure you know what you are spending money for and why. Communicate clearly to the members how the budget was arrived at. What the members really want is reassurance that care has been taken. So, rather than a fruitless defense of apples and oranges, follow a fruitful budget process that communicates financial stewardship.
For more on HOA budgeting,