Why Do So Many HOAs Fail To Properly Plan For Predictable Expenses?
Written By: Richard Thompson
Monday, May 21, 2018
A fortune teller asked me to gaze into her crystal ball. "I see wear and tear in your condominiums future. I see a new roof will be needed. I see cracking paint and asphalt in need of repair. I see gasp no money to pay for these things"
It doesnt take a fortune teller to predict that common elements are going to wear out and it doesnt take a crystal ball to predict that HOAs are going to need money and a plan to fix them. So why do so many HOAs fail to properly plan for these predictable events and expenses?
The truth is that too many HOA boards are busy putting out this years financial fires and havent the time to think about next year and beyond. Remember, "its hard to drain the swamp when youre up to your behind in alligators". In other words, its easy to lose track of long term goals
when you get sidetracked by more immediate demands. Putting out fires is what HOAs do, right? The poorly run ones seem to do just that.
HOAs are no different than any other business. Those that are successful engage in long range planning. Those that fail to plan fend off disaster after disaster and board members come and go through a revolving door. No real magic here. To know where you are going, you have to have a destination in mind. In spite of bumper sticker wisdom, those that wander really are lost.
So back to the HOA scenario. When a homeowner association doesnt have the funds to handle a major repairs, they defer those repairs until the funds are available. Of course, money doesnt grow on trees and without a plan to collect more money, band-aiding and deferring become the default reality and slippery slope.
How do you steer your HOA back up to high and stable ground? The first step is to review your reserve study. "Whats a reserve study?" you say. A reserve study identifies all common element components that have useful lives between 2 and 30 years like the roof, fences, decks, paint, paving, etc. The average condominium has 15-30 components. The average high rise condo can easily have 100. And HOAs that own golf courses and marinas can have many more. Regardless, a reserve study is customized to the HOA in question.
SIDEBAR: "But our condominium is small", you say meaning, "why is a reserve study even necessary in our case?" Its basic math: The more people you have to share the cost, the less the cost per person. Smaller HOAs have a greater need for reserve planning because the cost per person is greater.
After the component list is determined, a current repair or replacement cost must be determined for each as well as the remaining useful life. With this information and the current inflation factor, a funding plan can be made to instruct the board how much money to collect and set aside each year to meet future financial needs.
While there is no state or federal requirement, the reserve study should be performed by a professional since evaluating condition of components and establishing useful lives and current pricing takes special training that few boards have. The professionals carrying the highest credential in the industry, the PRA Professional Reserve Analyst, belong to the Association of Professional Reserve Analysts. A list of members and contact information can be found at www.apra-usa.com.
Rather than crystal ball your future, get a proper reserve study done and follow the funding and schedule recommendations. Leave the crystal balling to Lady Luck.
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