Incurring HOA expenses is a normal part of operating a community. Yet, when expenses become too high, it can be difficult for the association to remain financially healthy. Fortunately, there are strategies an HOA can implement to cut costs without sacrificing the community’s needs.
Common Reasons for Rising HOA Expenses
Homeowner associations collect revenue and incur expenses on a day-to-day basis. While HOA boards try to keep spending at a reasonable level, some expenses are outside their control.
That said, an increase in HOA operating expenses can have several possible causes. Let’s discuss the most common ones below.
1. Poor Budget Planning
Board members are responsible for preparing the annual budget. This includes projecting operating expenses, such as maintenance, landscaping, insurance, and utilities. When boards fail to accurately anticipate expenses (or even come close), expenses can seem inflated.
2. Higher Delinquency Rate
Sometimes, it may not be the expenses that increase, but rather the revenue just can’t keep up. Associations rely heavily on HOA dues to fund expenses and projects. When too many owners default on their dues, revenue stalls.
3. Rise in Vendor Rates
An association may list the same line items in its budget’s expenses section. But when vendors raise their prices, anticipated costs can quickly fall below reality.
4. Economic Factors
Changes in the economy can also affect an association’s expenses. Inflation, wage increases, and rising material costs all directly affect goods and services.
5. Increased Legal Exposure
If an association constantly finds itself in legal trouble, attorney’s fees are bound to skyrocket. Moreover, greater legal risks tend to call for more comprehensive insurance coverage, resulting in higher premiums.
6. Deferred Maintenance
Some boards may think that postponing necessary maintenance is a good idea because it keeps dues low in the short term. Yet, years of delays will eventually catch up.
The same maintenance work will still be necessary months or years from now. The only difference is that they are typically cheaper today than they will be in the future.
7. New Projects
Many associations use projects or upgrades as ways to continuously improve the community. While there’s nothing wrong with that, these improvements cost money — and lots of it. Apart from construction costs, boards must also consider maintenance, utilities, insurance, and future repairs for each new amenity.
How to Reduce HOA Expenses
Lowering costs is the first thing that springs to mind when faced with a budget crisis, but most self-managed boards don’t know where to start. Here are the best ways to reduce HOA expenses without cutting essential services or sacrificing quality.
1. Trace the Budget Variance
The most straightforward way to reduce HOA operating expenses is to adjust spending. Board members must identify which line items consume a large portion of the budget. To do this, they must calculate the budget variance.
Simply put, the budget variance is the difference between the actual and projected costs. If the actual costs exceed the budgeted amount, the association has spent more than expected.
Compare the annual budget against the expense report. Go through them line by line. This will shed some light on which items experienced a spike.
Boards can also delve further into the matter by investigating the cause of the variance. From there, the HOA board can make necessary adjustments.
2. Renegotiate Existing Contracts
Vendor contracts are not set in stone. If landscaping costs are too high, the board can open a dialogue with its landscaping contractor about adjusting rates, securing discounts, or changing the scope of work. Of course, there’s no guarantee that the vendor will oblige, but it’s certainly worth trying.
3. Get Competitive Bids
If a current vendor isn’t working out or if there’s a new project up for grabs, associations should solicit multiple bids. The general rule of thumb is to obtain at least three proposals from three different contractors. Casting a wide net gives the HOA more options and a better look at the market.
4. Reduce Unnecessary Spending
Some expenses are essential, such as maintenance and utilities, and these shouldn’t be cut from the budget.
That said, there are expenses that the HOA can certainly do without, such as social events or neighborhood parties. When reducing HOA expenses, start with the ones that aren’t integral to operations.
5. Improve Energy Efficiency
Associations should consider switching to energy-efficient lighting, irrigation systems, and equipment. Common areas can use LED lights to reduce electricity consumption, while smart irrigation systems can help conserve water. Many communities are also going solar.
6. Ensure Proper Maintenance
Preventive maintenance can go a long way in keeping costs low. This practice can minimize breakdowns and prolong the lifespan of common elements so HOAs don’t have to constantly pay for replacements.
7. Enforce Collection Policy
Saving HOA money doesn’t always equate to lowering expenses. Sometimes, an HOA must increase its revenue instead.
If the board has determined that all expenses are essential, then budget shortfalls may be more related to dues collection. Associations should consistently enforce their collection policies to recover delinquent accounts and improve cash flow.
8. Review Insurance Annually
Some boards resort to cutting back on insurance to reduce HOA expenses, but this is usually the wrong move. Insurance is an essential form of protection, with Illinois law even requiring one type of insurance (a fidelity bond).
Just like many things, with insurance, the cheapest rarely equals the best. Slashing coverage just to lower premiums could end up exposing the association to much higher costs later on.
9. Embrace the Digital Age
Technology has not only streamlined countless processes but also introduced new ways to reduce HOA expenses. In the past, associations would always spend money on paper, printing, and mailing costs. Today, communication can take place entirely electronically.
10. Prioritize Projects
Before building a new clubhouse or renovating the pool, boards should first ask themselves if these projects are essential or simply cosmetic. Associations must learn to prioritize expense items, with necessary maintenance typically coming first. Those other improvements can wait until the HOA is back on its feet financially.
Should an HOA Raise Dues to Cover Expenses?
Many associations consider imposing an increase in regular dues to meet all their obligations. Granted, it’s a move that’s unpopular with homeowners, but sometimes, it’s the only answer.
Dues are the primary source of revenue for HOAs and condo associations. Some boards keep dues artificially low or refuse to raise them to score points with residents. Yet, as costs continue to rise, it will be nearly impossible to cover all expenses this way.
It’s only natural for dues to increase over the years. That said, board members may encounter pushback if they impose significant hikes in a short period. If feasible, associations should consider gradually increasing dues to help ease owners into the new normal.
Word of Caution
No matter how hard boards try to fight it, HOA expenses can increase for several reasons, including inflation, insurance premiums, and rising vendor rates. Boards can respond by reviewing expenses, negotiating contracts, prioritizing costs, and reducing non-essential spending. Still, cost-cutting should never be used as an excuse to delay maintenance or underfund reserves.
Westward360 is a trusted partner for HOAs and condo associations across the United States. To get started on expert association management, contact us today or request a proposal online!
