By Kevin Lucas, RealManage
Nobody LIKES to have those hard discussions with board members and homeowners on the reality of the Association’s financial health, but it is increasingly becoming a necessity within the HOA industry. Over the past 10 years, we have endured dramatic price increases across the board, including basic labor rates, material price increases in some industries of more than 100%, and insurance premiums that have skyrocketed. It is a rarity for an HOA board to adjust assessments in a timely manner when these increases occur, as most often the increase is realized after an annual budget has already been ratified. So, each year the board is faced with not only planning for another unknown increase, but also trying to make up for previous increases that were realized after the last budget ratification process. In most instances, a board is stuck playing catch-up when it comes to financial health.
It is imperative that CAMS and boards have those hard discussions on the reality of the financial impact of previous increases and potential future increases, when preparing for the upcoming budget process and ongoing conversations with homeowners. Simply stated, within an HOA, there are two ways to balance a budget – 1) Reduce costs incurred to reduce the cash outflows of the association; and/or 2) Increase inflows of cash through the increase of assessments.
Most associations have already been working on reducing costs, and as a result, most associations are at the BARE MINIMUM of services being provided. This “tightening of the belt” by most boards has worked in reducing the overall assessment increase, but many homeowners are now noticing the reduction in the services performed by the HOA.
The only other way of balancing a budget is to increase the cash inflow, by increasing assessments, to cover the additional costs and recoup the previous unbudgeted increased costs that most associations have already incurred. The conversation of increasing assessments always comes with negative connotations, as nobody likes to pay more for the same services (or even reduced services), but just as homeowners are now paying much higher prices for gasoline, bread, and beer, the vendors that perform the services are all paying for higher priced gasoline, labor, and insurance.
When CAMS and boards sit down to discuss the upcoming budget, a discussion based in reality is required. Review the costs incurred that were higher than the budget, to determine the total amount of previous year’s shortfall that needs to be recouped, have a legitimate discussion on anticipated costs for the upcoming year on those items that historically have been higher than anticipated, and then also have a conversation regarding service level changes that have occurred (or are still on the table to occur in the future), before any budget discussions are held. By documenting the shortfalls realized, service level reductions instituted, and cost increases anticipated, the board can then list out the necessity of an assessment increase in black and white when presenting a proposed budget to homeowners. There is nothing wrong in being cordial when having those discussions, but laying out the facts of the association’s current financial position is necessary to avoid rumors, differences of opinion, and assumptions.
The discussions are never easy when it comes to the financial impact of increased assessments on individual homeowners, as it will have a very personal impact on each individual differently. It is important to remind homeowners that the HOA is a business that is in charge of running a community, versus a community trying to run a business. Hard decisions are the responsibility of the elected board members to move the organization in a positive direction to help the overall health of the community. By presenting the FACTS in a very concise and easy to understand presentation, it is easier to educate the homeowners on the reasoning behind the proposed assessment increase, along with the alternatives of not making the hard decisions. Showing compassion of the impact these decisions have on individuals is a necessity, but it is important to stay focused on the overall impact on the community, as opposed to the individual.
This can be considered a harsh approach, but the presentation of FACTS, ALTERNATIVES CONSIDERED, and the ANTICIPATED IMPACTS of those decisions can be considered a “Tough Love” approach when presenting information to homeowners. When decisions can be boiled down to basic math – more funds need to come into the HOA to pay for the higher costs incurred to avoid the reduction in the level of services – homeowners may not LIKE the results, but they can understand why decisions were made as they were.
Kevin Lucas CPA is a Financial Manager for RealManage and has been in the industry as a Management Company Owner for 20+ years, before joining the RealManage team. Financial Stewardship has always been my priority, with individual compassion sprinkled in, but I feel that Association Financial Health is our industry’s top responsibility.
