Tuesday, August 19, 2014

Budgeting Basics

Communities in the midst of budget season often request a reasonable estimate of the dollar amounts for various expenses.  The variables prevent us from making exact comparisons from one community to another (location, amenities, number of homes, age of property, etc.).   With that being said, here are some noted trends:

For 2015, projections are that rates in Georgia will be increasing by 8% due to all the claims that occurred during the freeze in early 2014.  Dividing the total annual insurance premium by the number of homes averages $15 to $30 per door in HOAs, with costs dropping as the number of homes increases.  For condominiums, very small communities (fewer than 21 homes) may run $400 per unit, and then trend downward to $250 per home in larger neighborhoods.

If your insurance is below these rates, this may indicate that coverage is missing, or that not all areas are adequately covered.  Very high rates may be justified by recent claims against your policies.   Otherwise considering collecting quotes from other insurers.

Per a study by Clemson University and a white paper by economist John Harris, 25% of a property's value is from landscaping.  Improving the quality from an average to a good condition increases value by 10%, and going from good to excellent raises it another 5%.  Excellent landscaping also reduces the average time a home is for sale by 10% to 15%.  Do not scrimp in this area!

Legal Fees
As noted in another one of our blogs, the average annual expense for legal fees is 4% to 6% of the budget.  Time and again, we see a community plan to only spend 1% in this category, and end up going over budget.  Funds are diverted from landscaping to cover the shortfall, which then drives down home values (see above).  Legal fees are a necessary evil.  A firm and consistent collections program is a must.  Those homeowners who are on the fence about whether or not to meet their financial obligations to the community (and also to their neighbors) will continue paying assessments if given a clear signal about collections.

Setting aside money for long term and high dollar projects is a must.  In the past, many associations could get away with ‘kicking the can down the road’ and deferring maintenance on items such as roadway or pool resurfacing, or roof replacement.  Those days are over.  Local governments are more involved in enforcing action on detention pond maintenance, and courts are ruling that communities must address maintenance in a timely fashion.

In our sample of communities reviewed, we discovered that 39% of these failed to save or plan for such expenses!  These communities ended up spending 5% to 9% of their budget on unplanned capital expenses.  For those that did plan, the average budget overage was 2% for HOAs and condominiums actually averaged a -1% (they spent less than planned).

A reserve study by a third-party qualified engineer is needed every three to four years.  The first study will be the most expensive, with follow-ups running perhaps a third of the price.  New communities should be at least 50% fully funded to handle capital expenses, while 25+ year old communities can expect at least 70% full funding to reduce the need for special assessments. 

In condominiums, it is not usual to have 25% to 35% of the annual budget dedicated to saving in a reserve account and spending money on current year capital projects.  The bare minimum cash they should have on hand is 45% of the annual budget, less three months’ of operating expenses.  For example, if the annual budget is $100K, they need to have at least $33,750 in reserves, and likely more than this depending on the results of the reserve study.  For HOAs, the minimum would be 15% of the annual budget less three months’ of operating expenses, or $11,250 in the above example.

Some people prefer a rule of thumb for how much total cash should be on hand per home in the community.  The minimum for condominiums would be $3,000 per home.  It is variable for HOAs, and may range from $300 to $1,000 per home depending on size and amenities.

It cannot be restated enough:  The above advice is only to be used as a starting point for determining the health of your community’s budget.  Depend heavily on the advice of your property manager, and err on the side of caution if in doubt on any particular component.

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