Part of the HOA board’s job is to prepare the budget and calculate HOA assessments for the coming year. Unfortunately, not everyone knows how to do this. The process is easy if you know where to begin.
In this article:
The Right Way to Calculate HOA Assessments
For most HOAs, October means the beginning of the budget season. And that means regular assessments may increase — and your board could be facing some less-than-fun questions and upset over the increases.
The problem often stems mostly from the board failing to property plan for each year’s budget. They might base the assessments on budget factors that aren’t really relevant, such as a percentage shown in the community documents or the cost of living in the association. On the other hand, another problem is board members deciding not to raise the assessments at all for fear of making an unpopular decision.
The core issue here, however, is that most homeowner associations just don’t understand the right amount to charge for assessments. Although the procedure on how to calculate HOA assessments typically lies within the bylaws, there are some other things you must take into consideration.
How to Determine HOA Fees
Bottom line: nobody is excited about having to pay higher assessments, even board members. So, you have to first look at the association’s budget areas: expenses, income, and reserves. You must make sure your HOA is covered in each of these areas for the next year.
A homeowners association has a responsibility to maintain and repair all common areas within the community. Maintenance and repair services don’t come free. The board needs to get that money from somewhere. And while the HOA can have other fundraising activities, its main source of income is the HOA dues.
When planning your budget, it’s important to take everything into account. What type of vendor services do you need this coming year? Do you expect to pay more or less than before? The usual items to consider are:
- Maintenance and repairs
- Employee salaries
- Vendor services
- HOA management fees
- Reserve funds
You’ll then want to calculate the overall income needed from your homeowners so you can calculate HOA assessments. So, you’ll add up total budgeted expenses, the total contribution to the reserve, and all miscellaneous income.
Then, to determine how much each owner will pay per month, take the total in assessments you calculated and divide that number by the number of homes in your association. Then divide that number by how many assessments there will be (such as 12 for each month of the year).
Some associations calculate HOA dues based on the size of the property. For instance, a resident with a larger property may pay more than a resident with a significantly smaller property. Others divide the assessments equally. Make sure to check your bylaws to know how you should divide HOA dues.
Can an HOA Raise Monthly HOA Fees?
In a word, yes. An HOA does have the right to raise HOA assessments if the need arises. However, there are limits to how much an HOA can increase dues. Some HOAs have these limits defined within their governing documents. But, there are also state laws concerning the increase of HOA fees.
For instance, in Arizona, an HOA can’t raise dues by more than 20% every year without getting a majority vote from the community. So, make sure to check your state laws and governing documents to ensure you remain in compliance with them. This way, you can avoid running into any legal trouble.
A Few Other Considerations
Be sure NOT to count any leftover money (surpluses). When making your budget, do so like there was no money left over from the year before. While an HOA is a not-for-profit organization, taking retained earnings into account for your coming year’s budget can spell disaster in the long run. Your operating funds might come up short in the end.
Also, don’t forget to consider owner delinquencies. If your community has quite a few, you might have to add an extra income allowance so you don’t come up short on income that will cover the reserve and expenses. In this case, your assessments might have to be higher.
The Consequences of Low HOA Dues
While lowering your HOA assessments may get you some brownie points among homeowners, the move may cost you in the end. Setting HOA dues that are too low might result in insufficient funds for your HOA.
This will inevitably lead to inadequate maintenance of common areas and a diminished curb appeal. In turn, property values may plummet, and homeowners aren’t going to be happy about that either.
Additionally, by lowering HOA dues, you might open the association up to liability. Some federal and state laws require an HOA to keep various infrastructures up to a certain standard. By reducing fees, your HOA may not be able to afford maintenance and repairs for these infrastructures. Homeowners can file a lawsuit against your board or the HOA.
Finally, if you set assessments too low, you’ll likely end up either cutting costs or asking for more money throughout the year. When your operating funds run low and expenses start to pile up, your HOA board may be forced to levy special assessments. And, for many residents, special assessments are something they’d like to stay away from.
Incorrect Calculations Have a Domino Effect
As you can see, it all starts with timely and accurate budget preparation. By failing to plan your budget properly, you run the risk of undercharging your residents. This, in turn, will lead to a shortage of funds and the possibility of special assessments. If you can’t impose special assessments, a lack of funds will eventually lead to poor maintenance of the community. As a result, your HOA and its members will suffer.
Use this advice to help you calculate HOA assessments this year. If you’re prepared and understand why the fees are there, it’s easier for you or your HOA manager to explain to your owners what’s going on. And that will help keep them more satisfied and trusting of your judgment.
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