Everybody loves HOAs
October 9, 2012 12:41 PM   Subscribe

What's an ideal budget for an HOA? I think I need to make a proposal for a dues increase but I'm not sure if I've thought of everything.

At the beginning of the year I reluctantly became the HOA president of our small, 3 unit building. The previous president moved out and I discovered he hadn't been keeping any type of ledger for 8 years, although I do have a bag of receipts. The HOA also has almost no reserve left; we're operating on a very narrow margin and should have about a $200 surplus at the end of the year. It makes me nervous to not have any money in reserves, especially since I had to increase our HOA insurance deductible to $2500 so we could afford to keep paying our insurance premiums. After nearly a year of operating the HOA I feel like I have a good idea of what our expense budget for 2013 will be. I'd like to increase dues so that roughly 20-25% of the HOA income will go towards reserves. If we don't have a dues increase, our 2013 income will allow us to put 7% towards reserves, assuming we have no maintenance or emergency costs.

A few more details about the HOA: Our expenses are basically just steam heat, water, and insurance. I cancelled our landscaping this year and have been doing it myself since we can't afford it, same deal with snow removal. The building is a large Victorian that was built in 1886 and converted to a triplex in 2001. The boiler, water heaters, and roof were new in 2001. We had a very significant increase in insurance premiums in 2012, and our water bill is going to increase 5.5% in 2013. Our dues are split across the HOA based on the square footage of our units and my unit accounts for only 19% of the total HOA dues, while the largest unit accounts for 57%. I live in Colorado if there are any specific laws that are applicable.

My question is, is a 20% operating margin enough? I'd like it to be higher but this needs be be approved by the majority of tenants (so basically just one other person needs to agree with me). Are there any things I should be doing as the HOA president, like identifying and prioritizing maintenance projects? How would I do something like that? Does anyone have any advice to give me? Everything I google about HOAs usually involves large management companies. The other two tenants are pretty laid back and approachable but obviously no one likes to be asked to pay more money.

As a side note- although the previous president had terrible record keeping skills, I don't think there was any shady business or mis-management; there's just been a too-narrow operating margin and we haven't had a dues increase in 9 years even though our expenses have risen significantly.

Any advice on operating a small HOA is appreciated.
posted by shornco to Home & Garden (11 answers total) 2 users marked this as a favorite
There's a San Francisco lawyer named Andy Sirkin who has some useful references. Otherwise I suggest a good web search.
posted by blob at 12:54 PM on October 9, 2012

I ran an HOA for a 20 unit condo building.

First of all, shop your bills around to see if you can get anything less expensively, especially Insurance.

Secondly, meet with the other owners to discuss the budget with them.

Our building voted not to have a reserve, but instead to assess whenever we needed anything. When I took over the books, we had a few thousand dollars in reserve.

Husbunny is an actuary, so I tend to look at this stuff as a way of managing risk. Would you rather escrow some money knowing that it may not be needed in the distant future, or would you rather be socked with a bill all at once? What if you sell and there's a big amount of money in reserve? Can that person get it back? Does the new owner need to replace it. You'll be AMAZED at the nuances of this thinking.

Interestingly enough the bottom floor owners didn't feel the need to chip in for the building's roof because it wasn't technicaly over their unit. True Story.

When do you think that these systems will need to be replaced? How much do you anticipate needing to spend to do so? Present that information to the folks and discuss.

How much have things gone up over the past decade? You should have the bills ready with an easy to read spreadsheet to explain.

Do not become the guy who martyrs him/herself to the building. Get a landscaper again and charge each unit for it.

You may not be able to HAVE much of a reserve by statute. You need to know what the rules are.

When I took over our books, I contracted with the largest Condo Lawyer in Florida and got a management company to do the bookkeeping. Best decision I ever made.

The lawyer bought peace of mind, also the HOA hadn't filed taxes....ever and we needed to deal with it. The management company cut the checks and mailed them to me for signature. They did the annual statements, kept the books and made sure that everything was paid on time.

Don't let this take over your life. It will if you let it.
posted by Ruthless Bunny at 12:56 PM on October 9, 2012 [4 favorites]

It's my understanding that, from a budgeting perspective, there are basically two kinds of small condo associations:
  1. Ones that depend on assessments -- these have minimal condo fees and assume that everyone will chip in when there's an additional expense (e.g. a roof repair, an exterior paint job, a new boiler)
  2. Ones that try to avoid assessments -- these have higher condo fees and a growing reserve account that's used for non-routine expenses.
It's up to your members which one you want to be. When I bought my condo a few years ago, they were #2 and I convinced them to switch paths. The association has 7 units and they agreed to an increase in fees largely because it would make the association appear more responsible and therefore make it more attractive to buyers when the time came to sell their units. Another advantage that didn't factor into their thinking but may play a role for you is that given the state of the economy today, the association is better protected from a unit owner's financial problems (e.g. job loss that results in late condo fee payments) if there's more of a buffer.
posted by cranberry_nut at 1:00 PM on October 9, 2012

Oh, one other thing -- we opted to budget for reserve contributions explicitly (10% of our annual budget) because having that item listed was a requirement for some mortgage lenders at the time. Since many owners in my association view their units as investments, aligning with industry best practices early on could make it less complicated to sell later.
posted by cranberry_nut at 1:03 PM on October 9, 2012 [1 favorite]

As others above have said, there are two ways to do it and neither is right or wrong. I ran an HOA for a 3 person, one building unit in Chicago, and we were in the "minimal fees, rely on assessments" group. We operated by the skin of our teeth, with only $3600 per year to cover insurance, common electric, filing fees, and minimal maintenance work. Everything else was special assessment. We had around $200 in the bank at any given time. By contrast, our next door neighbors paid $300 per month in a 4-unit building and their HOA had an account with close to $30K in it. They were in a new building so there wasn't much to spend it on even if they wanted to.

It was fantastic to pay only $100 per month, and in a city with a large stock of converted 3-flats I think the super low assessment was a differentiating feature when we sold our place. On the other hand, when we had major expenses (painting of the common areas one year and a new porch that went all the way up the back of the building the next) there was some hemming and hawing from one of the unit owners about whether it was truly necessary.

I would think that practically speaking if you are going to raise the rates in order to build a cushion you should be prepared for people to be less willing to agree to a special assessment in the future, on the theory that they have already increased their pay and that should be it. So if you are going to do it make it count.
posted by AgentRocket at 1:22 PM on October 9, 2012

Here's a site that talks about Colorado HOA Law, sponsored by an HOA law firm.
posted by Ruthless Bunny at 1:34 PM on October 9, 2012

Start with talking to a local expert. I was given to understand at my most recent HOA meeting that there is a large difference between an HOA and a condo association, legally speaking.

One other interesting note - a friend's condo group has a certain dollar amount fee monthly, but at the end of the year for the "big meeting" they remind people that if there is less than X% of participating units represented, the monthly fee will automatically double for the next year (I'm dying to get that one written into our laws! Maybe people would SHOW UP!)
posted by tilde at 1:34 PM on October 9, 2012

FYI, as I recall a couple years ago the FHA and Fannie tightened up their lending regs on condos --- I believe they won't lend on buildings where less than 10% of the budget goes to the reserve. Don't recall if there's any exceptions for small buildings. If so, however, if one of the owners wants moves you may be screwed, so I'd look into it.
posted by Diablevert at 1:48 PM on October 9, 2012

I'd get a reserve study - no clue how much it would cost for a small building in CO, a few thousand dollars I am sure (unfortunately), but it would give you some good guidance. I'd at least get some scope and cost proposals.
posted by mrs. taters at 1:52 PM on October 9, 2012 [1 favorite]

Seconding the idea of a reserve study, particularly given that it sounds like there was poor record keeping and it's a very old building. The zingers are deferred maintenance (we never did maintenance on the roof and now it needs to be replaced, oh no!) and unexpected expenses which might be detected/planned for (the foundation is crumbling).

Given the small size of your building you might be able to avoid the full on reserve study expense by spending a few hundred dollars on a thorough inspection.

It's a different scale of building/problem, but as an example the 18 unit residential condo I live in in Seattle deferred maintenance, refused to deal with reserve study and ultimately everyone in the building got whacked with enormous assessments that were equal to 1/3 or 1/2 of the market value of the property. Lawsuits and whatnot ensued. This was before our time but it was a hard-earned lesson to get ahead of maintenance while you can--years later this assessment still has many longtime residents underwater on their initial investment.

Good luck, sounds like you're thinking about the right things and taking this responsibility seriously;.
posted by donovan at 2:15 PM on October 9, 2012

It's a small building. Would owners prefer variable special assessments or a higher fixed monthly assessment? That's really the question you are asking.

In any case, you should not be doing landscaping and snow removal. You are not an employee. A lawyer can help you understand the HOAs liability in the case of injury to you. There is also your personal liability if someone was slipped on the ice, etc. Keep your personal and financial life distinct from the HOAs.
posted by 26.2 at 2:48 PM on October 9, 2012 [1 favorite]

« Older What does this Italian phrase from 1634 mean?   |   Brain cloud? I knew it! Newer »
This thread is closed to new comments.