Top 10 things to avoid in HOA financial management

Key Takeaways

• Reflect spending and income realities in your HOA’s annual budget.
• Encourage timely payment of fees, assessments, and fines with online payment portals available in HOA financial management software to avoid vigorous pursuit of overdue debts.
• Provide for foreseeable maintenance, planned improvements, and unforeseen contingencies with reserve funds and adequate insurance.
• Strengthen the community with the transparency offered by annual audits, accessible financial reports, and frequent HOA communications to homeowners.

HOA Finances 101: Avoid These 10 Common Mistakes

With some forethought and purposefulness, serving on your homeowners association board can be a positive experience, but the job does come with some definite fiduciary duties. Automating most of the tasks of HOA finances means more useful and accurate records, more convenient transactions and communications, and more time for board members to ensure they avoid some all-too-common financial blunders.

Some of these mistakes may even have legal ramifications if fiduciary duties are not fulfilled. All of them have the potential to create distrust between homeowners and a board within an HOA.

Inadequate Reserve Funding 

Failing to allocate sufficient funds for future major repairs and replacements can lead to financial shortfalls that require juggling accounts and budget categories. Worse yet, they may necessitate special assessments.

Amounts and categories vary by jurisdiction and your community’s specifics, but reserve funds for contingencies are required by law in most states. Further, they’re something your neighbors and HOA members will naturally expect board members to already have in place when needs arise, and community trust can erode quickly in such a failure of foresight. 

HOA financial management software can help plan for emergency spending and conduct reserve studies, both by giving a clear picture of your community’s current financial position and helping to determine how best to reach needed reserve-fund levels.

Mismanagement of Delinquent Accounts

Failure to promptly address overdue fees, assessments, or fines can impact the association’s financial health. The immediate impact of impinged cash flow on a few debts may mushroom later if the HOA develops a reputation for lax collection efforts. Delinquent debts can turn into bad debts that must be written off if a homeowner files for bankruptcy protection or moves without leaving contact information.

The most effective way to keep accounts receivable from becoming bad debts is to prevent their delinquency altogether. HOA financial management software can help compel payments via communication tools customizable to contact members with an outstanding balance, automated reminders of overdue fees and fines, and effective overdue reminders that can be sent either electronically or automatically printed and mailed. Better yet, convenient online payment portals and synchronized banking may keep procrastinators from becoming late payers or non-payers.

PayHOA accounting and communications software is designed for homeowners associations and the tasks they face. Not only can it help improve the level of interaction with past-due property owners as required, but it enables HOA officers to easily track payment collection efforts as reminders to the delinquent homeowners and for courts’ use if legal action is required to collect debts.

Lack of Regular Financial Audits

Audits are the most definitive proof of fiscal responsibility an HOA can offer its community. Conducted by an accountant or accounting firm unconnected to the association or its board members, an independent audit reviews your HOA’s records to assess overall financial health and compliance with legal regulations and accounting principles. Its scope may include bank records, transactions, and meeting minutes, and how well the organization follows its stated policies and procedures. 

Periodic audits (commonly one to four times a year) offer transparency both to regulators and to the community’s members. HOA financial management software can generate the records and reports that facilitate a pain-free audit process.

Neglecting Financial Reports

As important as periodic independent audits are internal reviews of your HOA’s finances, overlooking regular review of financial statements can lead to missed discrepancies, poor financial decisions, and decreased community trust.

As with audits, PayHOA software can automatically generate financial records, budgets, and other documents that make it simple to review your HOA’s fiscal health and to keep community members informed through reports with any level of detail they find useful without being overwhelming.

Poor Budgeting Practices

Creating inaccurate homeowners association budgets can cause overspending and financial instability that trigger special assessments and community distrust. The budgeting process should start months before your HOA’s fiscal year begins, should be a team effort, and share its results with community members for maximum transparency.

The budget should provide some cushion for cost increases (such as a utility price hike) and acknowledge that payment of some fees and assessments may defy even the best collection efforts. Every reasonably foreseeable category should be anticipated, including the following:

• Taxes
• Insurance
• Auditing and legal fees
• Utilities
• Office expenses
• Reserves for emergencies and scheduled maintenance

Budgeting for significant future projects is part of this same process. When an HOA plans for such facility additions as a picnic pavilion or pickleball court, reserve funds for that improvement need to become a budget line item and be built into regular homeowner fees and dues. 

Generic accounting software like QuickBooks lacks the HOA-specific categories that create accurate and useful budgets with realistic income and spending estimates. HOA financial management software like PayHOA easily reports the previous years’ income and expenditures in the most useful forms and suggests budget adjustments.

Ignoring Rising Operational Costs

Not adjusting budgets to account for inflation and increased expenses can deplete an HOA’s resources quickly. After three decades during which inflation seldom broke above 3 percent, rates above 6.5 percent in recent years forced mental and budgetary adjustments in households, corporations, and nonprofits alike.

PayHOA lets you compare your HOA’s year-over-year costs. In addition, it facilitates adjustments for projected increases in any expense category, from a Bookkeeper’s salary to utility-rate increases to tax hikes on HOA-owned property.

Lack of Transparency

As mentioned above, not communicating financial decisions and statuses can erode trust. Within a homeowners association, this can lead to disputes that consume volunteers’ time and fray nerves. Taken to an extreme, such differences can lead to legal battles that can be expensive and leave permanent relationship ruptures within your community.

Communications and reporting tools available in HOA financial management software offer transparency on many fronts. From community event calendars to notices and minutes of board meetings to financial reports and annual budgets, technology such as PayHOA offers as much detail as residents find useful.

Underestimating Legal Expenses

Not budgeting for potential legal costs can strain finances when unexpected issues arise. Attorneys are usually hired to write the founding documents for any HOA and may be tasked with collecting debts from slow-paying property owners. In our litigious society, however, chances are your HOA will someday need legal representation regarding a conflict.

Such exigencies can arise when a homeowner accused of a rules violation contests the matter, when developers on adjoining property encroach on the HOA’s land or its residents’ right to “quiet enjoyment” of their homes and grounds, or when there’s a contract dispute. A good attorney will try to resolve the conflict with the least court involvement, through negotiation or, failing that, mediation. If court action is required, however, a lawyer experienced in real estate law, contract law, and litigation is indispensable.

Attorney fees can easily be several hundred dollars per hour or more (plus expenses). HOAs can plan for their eventual need for legal counsel by establishing a reserve fund to cover fees, keeping a law firm on retainer, or buying legal insurance that pays for attorney representation as needed.

Over-reliance on Special Assessments

Frequently resorting to special assessments indicates poor financial planning and can burden homeowners, damaging trust between the community and its board members. Disaster recovery costs are an obvious example. Weather-related disasters from wildfires and winter storms to hurricanes, floods, and tornadoes have cost Americans nearly $3 trillion since 1980. For HOAs, the first defense against catastrophic expenses following such devastation is adequate casualty insurance. Even with good coverage, reserve funds may be necessary to meet copays or to recover from damages that exceed policy limits.

Poorly planned expected expenses may also trigger special assessments. Overestimating the time before roofs, streets, or utility infrastructure will need major maintenance is tempting but irresponsible. Such expenses should be part of reserves set aside from property owners’ regular dues. A cushion should also be added to planned maintenance funds for unforeseen increases. HOA financial management software provides tools to keep urgencies from turning into financial emergencies.

Neglecting Vendor Contract Reviews

Failure to review service contracts can result in overpayment or subpar services. Sometimes, previous boards forget or neglect to update new volunteers about existing contracts, which could lead to duplicate expenses. 

Periodic review of vendor contracts can take advantage of bidding competition to secure lower rates for goods and services. Quick review of accounts payable items can also save money by correcting errant invoices before payment is made, and some vendors provide a worthwhile discount for payments within two weeks of billing.

---

Well-managed and transparent HOA financial management prevents countless sources of conflict. PayHOA software can be board members’ best friend in reviewing invoices for inaccuracies, keeping contracts accessible for review, and timely payment of accounts receivable. Start your 30-day free trial today.