In pandemic times like these, it’s always a good idea to revisit the basics and ensure your HOA financial practices are in order. Through the years, we have looked at a number of HOA financial mistakes and provided advice on how to fix as well as prevent these regretful blunders.
Here are our top six HOA financial pitfalls, along with reminders on how to avoid them:
- Improper budgeting – it’s important for HOAs to annually consider both short- and long-term expenses, as well as inflation, possible foreclosures and bad debts, vendor rate adjustments, and sudden unexpected costs. When budgeting, an HOA needs to compare total expenses to revenue from dues. If expenses surpass the dues revenue, it might be time to increase annual fees. The board also needs to plan for regular contributions to the reserve fund, which is a savings account for major repairs.
- Not getting proper insurance – these policies protect the HOA from unforeseen circumstances. It’s a good idea for HOAs to carry directors and officers’ liability, fidelity, and general liability insurance. Boards should regularly review policies to ensure coverage is appropriate, as well as occasionally price shop to make sure rates are in line with market.
- Purchasing beyond your local area – this relates to items purchased as well as services. Unless there is a large cost differential, consider going local. It helps the HOA build valuable relationships with nearby vendors, and can cut down on costs like shipping fees. Local relationships can lead to higher quality work as well as discounts and rewards for loyal customers.
- Poor bookkeeping – good bookkeeping includes balancing the general ledger, keeping track of and filing receipts, and producing financial reports. Mistakes happen but they should not be consistent. If they are, it could point to an untrained board member or be as serious as embezzlement. At least one board member should review the financial statements each month. Watch for too many checks made out to individuals or cash, financial statements that don’t match bank statements, and declines in revenue.
- Failing to keep up with vendors – HOAs should regularly review vendor contracts, not only from a cost perspective but also a quality perspective. The cheapest vendor isn’t always the best. The HOA should also look at contracts for overlapping services between vendors. Keeping a list of approved vendors is key as well. This list serves as a resource for repairs but also can be a check and balance when reviewing expenses. If an odd vendor name shows up on a check, a board member or the PM can verify the vendor exists and that no fraud has been committed.
- Not filing a tax return – HOAs must file both federal and state (in Georgia) annual tax returns. When it comes to federal taxes, HOAs are required to file Form 1120-H. The good news is that if the HOA files under Section 528 of the Internal Revenue Code then most income is tax-exempt. This includes member dues and assessments, late fees and interest, and rental fees for common property. If an HOA does not file tax returns, it could be subject to stiff penalties and fines, and might ultimately lose its tax-exempt status.
Set Up Good Financial Practices
Good financial habits are vital to keeping an HOA in proper fiscal shape. Avoiding the most common financial mistakes can keep your HOA out of the red and free from large budget mishaps, fraud, and other monetary problems. If you have any questions about HOA budgeting, insurance, taxes, or bookkeeping, we can help. Feel free to contact me.
–Neal Bach, CPA