Bank Accounts, Funds, and Budget Items: What Does an HOA Need?

Key Takeaways:

• Self-managed HOAs find a variety of accounts helpful, but every HOA will need at least two—an operating account and a reserve account.
• Reserve funds may apply to scheduled maintenance projects, capital improvements, and legal contingencies.
• Operating accounts may apply to general expenses, payroll, insurance, utilities, community events, and petty cash.
• HOA-specific software can provide transparency and useful reporting for all types of HOA accounts.
• Each type of reserve fund may be kept in a separate bank account or pooled and tracked separately. 

HOA Accounts and HOA Accounting

If you’re involved in your homeowner association’s management, HOA accounting software can streamline your work. Certain types of accounts can further simplify your HOA bookkeeping. Every community’s goals, circumstances, challenges, and personalities are different, so not every account type is needed by every HOA. It may be more efficient to have several kinds of reserve funds in a single account tracked using purpose-specific software.

1. Bank Account – Operating Account 

The operating account is used for day-to-day expenses such as utilities, landscaping, monthly insurance premiums, and office supply costs. This account may require the most frequent review to ensure cash flow is adequate and that payments have cleared. Purpose-built HOA accounting software provides detailed reports on both ends of the scale – one option for complete transparency and another with just enough detail not to overwhelm users. 

2. Bank Account – Reserve Fund Account

The reserve fund is a savings account or other financial instrument for long-term, foreseeable maintenance such as roofing, repaving, drainage systems, and water or sewer utilities. Some states require a reserve account to cover major repairs without making special assessments the primary source of funding (no one likes a surprise assessment!). It’s always a good idea to have a reserve fund, if only to avoid commingling operating funds and reserves. Reserve funds are best when kept in certificates of deposit (CDs) or other high-interest accounts.

3. Bank Account – Capital Improvement Account

The capital improvement account is like a reserve fund but differs from the primary reserve account: Its funds are set aside for planned upgrades or major projects. This is useful for agreed-upon proposals like building new amenities or major infrastructure changes rather than for unexpected repairs. Many HOAs choose to store these funds in a CD or other high-yield account because they usually have a long-term plan to access these funds later. 

If your community is considering installing pickleball courts, enclosing a pavilion, or buying adjoining land for a greenspace buffering zone, for example, task-specific software such as PayHOA readily manages different categories within this account and helps track future funding for each specific project.

4. Budget Account – Dues and Assessment Collection Account

An HOA should track where all of its revenue comes from. The main revenue source for an HOA is typically through dues, also referred to as assessments. The HOA is expected to track this revenue separately from any other revenue and will need to report this revenue on pertinent tax forms.

These funds are the backbone of the legal and financial relationship between community members and the HOA, and as such must be handled with great care and transparency. 

Using HOA management software you can allow homeowners to pay dues and other fees by check, direct deposit and online. The software will also provide a complete charge/payment history for every homeowner and will allow the board to pull reports based on the budgeted revenue account.

5. Fund – Legal/Contingency 

A contingency reserve is a worthwhile foresight in case the HOA encounters issues that require the intervention of legal counsel —an encroachment on HOA property from the developer of an adjoining land tract, for instance, or when serious payment delinquency necessitates a foreclosure. The board may also need counsel to oversee legal compliance or to make recommendations on risk management and liability mitigation.

A legal/contingency fund might consist of several thousand dollars to cover a legal retainer in case of an unexpected need for representation. This avoids the need to take such funds out of operating expenses or to create the dreaded special assessment. If your HOA establishes a legal contingency fund, be sure its HOA accounting software will track it and provide useful reports.

6. Budget Item – Insurance Account

A homeowners association won’t always benefit from a designated bank account for paying insurance premiums. Because it’s a large recurring expense, having a budget item tracked separately in its accounting software likely is worthwhile. This means money is budgeted for monthly, quarterly, and annual premiums, and electronic tracking keeps such funds from being spent for other operating expenses. Out of this budget item premium payments can be made for property, liability, and worker compensation insurance, and for fidelity bonds as required by law. 

Additional benefits of HOA accounting software that can handle insurance as a budget item may include: 

• Budget forecasting for insurance cost increases
• Record of all premiums paid
• Making policies available online for HOA officer or member review, as the board chooses
• Software integration with master policy management

7. Budget Item – Utility Account

When water, electricity, gas, sewer service, and trash collection comprise a significant part of an HOA’s budget, keeping a separate utility account from which to pay them may help with tracking these expenses. Such monitoring occasionally alerts HOA officers or utility officials of a water or gas leak, but most often it simply makes budgeting easier and more accurate.

8. Budget Item – Community Event Account

In homeowners associations where parties, neighborhood cleanups, or other gatherings are a frequent part of community life, a community event budget item may help with budgeting and accountability for expenses like event planning, food, entertainment, and supplies. Letting everyone know that such an allocation of funds exists may spur the creation of more worthwhile get-togethers.

If your community has HOA accounting software such as PayHOA, its communications and calendar capabilities can also help foster connections between the HOA board and homeowners, individual residents, neighbors on a particular street, or those planning a community-wide event.

Don’t work so hard!

Your HOA management software should allow homeowners to pay dues and other fees by check, direct deposit, or online, and provide a complete payment history for every property or homeowner. Payment reminders automatically generated by PayHOA accounting software help reduce late payments, likewise reducing frustration among homeowners and HOA board members.

HOA management is crucial, but it doesn’t have to be excruciating. Task-specific software like PayHOA takes the drudgery out of billing, payments, payroll, and other HOA functions. It also

eliminates most potential for human error in managing your HOA’s accounts and funds.

To see if PayHOA is right for your community, start your free 30-day trial today.