The fiduciary experience elected homeowners’ association (HOA) board members and community volunteers can be extreme. If you are part of an in-house accounting subcommittee or hire a community management company, finances may be new terrain for you. Yet even if you use these services, it is vital to comprehend HOA financial management.
Reading and understanding this complete guide to HOA financial management will help you and your team improve your bottom line, accelerate growth, and bolster homeowner confidence in your community association leadership. Learn everything you need to know here about HOA financial management — from HOA accounting terms to fidelity bonds to the benefits of association audits.
HOA Accounting Terms You Should Know
Effective financial management begins with effective communication within an organization. A thorough understanding of the following HOA accounting terms will keep you and your team on the same page when it comes to the success of your community management company:
Top 7 Financial Management Techniques
One of the association manager’s primary duties is to manage the HOA’s finances. This involves careful planning, record keeping, and reporting to show responsible handling of resources to the board and homeowners.
Following are the top seven financial management techniques for successful business operations:
Taking your time and gathering the necessary information is vital to producing an accurate well-formed HOA budget. If you treat the process as a marathon rather than a sprint, you will have a budget to keep you on track during the year.
Start gathering documents and information on the first day of your current fiscal year. Use your monthly financial statements as the foundation for your upcoming budget. This will also help you generate a thorough business plan and create financial goals for the coming year.
Sending out requests for proposals can give you an accurate picture of vendor costs. Make sure to accurately evaluate the maintenance and repair costs and utility expenses by looking at what it cost you last year. Look over your reserve funds to be sure you have enough set aside for unexpected expenditures. Once you have all of this information, you can calculate the probable costs for your budget.
Following this, calculate your assessment fees and income from other sources, including late fees and additional fines. Once your HOA budget is formed, distribute it to your community members according to your state’s guidelines. With CINC, creating a budget, and maintaining financial transparency is a breeze.
An HOA reserve study is an in-depth analysis of the physical condition of your associations’ capital components. It serves as an appraisal of the financial health of the HOA’s reserve funds.
Your community associations’ reserve studies can give managers and board members a solid foundation for creating their budgets.
Examples of capital components include:
Reserve studies reveal to HOA managers and board members the life left in these structures and how much it will cost the association to replace them when they wear out. From this analysis, the board, working with a management company, can determine the budgetary dollar-amount required to be set aside each year.
To compute these numbers, reserve study specialists take the replacement cost and divide it by the sum of years the item is expected to last. Reserve funds should be able to completely pay capital component replacements or be funded as close to 100% as possible.
If reserve funds fall short when a project comes up for completion, the community association board will have to make the unpopular decision to raise assessment fees. Conversely, suppose an association charges fees that cannot cover the reserve fund. In that case, it can hurt the community if it is forced to find alternate methods of funding the replacement project.
To save money, an HOA must work with a reserve study consultant that knows the items to include in a report. The reserve study should be performed every few years to sustain the HOA’s financial health and preserve its good faith in the board.
Fidelity bonds are insurance policies put in place to protect the HOA from theft and fraud. Homeowners’ associations must carry this coverage according to federal guidelines for homes in the community to be purchased using FHA- or Fannie Mae-backed mortgages.
Associations can meet FHA standards by carrying fidelity bonds that cover:
Fannie Mae-backed loans require fidelity bonds with a maximum deductible of $25,000, and coverage equal to at least three months of regular maintenance costs.
If a covered event occurs, the HOA fidelity bonds will reimburse the association for lost funds. Covered scenarios usually include:
Fidelity bond coverage should apply to anyone who may handle HOA assets or funds, including HOA employees and board members, property managers, association management company staff, and bookkeepers. Third-party fraud or forgery may also be covered if money was lost due to the actions of someone working outside the scope of association business.
Community association management companies should consult insurance and legal professionals to ensure that each organization is managed with adequate and legally compliant fidelity bond coverage.
What Is an HOA Financial Statement?
HOA financial statements offer a documented accounting of the association’s economic activities. The objectives of an HOA financial statement can include:
Specific financial details must be on a financial statement, though these details can vary based on community bylaws and state regulations. The following should always be included on a report:
Financial statements should include as much detail as possible. The more, the better. Furthermore, HOA statements should be produced with as much clarity as possible. It should not take an advanced accounting degree to read an HOA’s financial statement.
Clearly produced, consistent financial statements are vital for HOA boards and managers to make prudent decisions. They give community members a better understanding of their associations’ health and allow them to participate more effectively.
If financial statements are incomplete or unclear, they can confuse association members and cause mistrust within the community and board members.
Using CINC’s powerful cloud-based association management software can help your HOA or accounting team produce timely and crystal clear financial statements.
HOA demand fees are outstanding debts, including unpaid dues, fines, and fees that the homeowner must pay to the HOA before selling their property. When a home in an HOA-governed community is sold, the transaction includes the following steps:
Demand fees typically include unpaid fines for HOA violations, delinquent association dues, late payments, collection costs, interest, ownership transfer fees, and buyer move-in fees.
An HOA management company can streamline demand fee calculations and payoff demand report preparations with CINC Systems’ software. Comprehensive accounting tools automatically reconcile accounts and create reports, and intuitive communication platforms facilitate more efficient and effective information sharing.
AMS Database An Association Management System (AMS) is computer software that gives HOAs and management companies significant capabilities to serve their clients. CINC Systems’ cloud-based software as a Service (SaaS) solution operates a community association with functionality for:
An HOA or management company gathers information in this database, which associations can use to maintain and expand membership, streamline monotonous tasks, and inform and engage members.
AMS software uses database information to create reports, assess fees, and track violations. It offers centralized access to the data needed to produce timely board packages. Association accountants only input the information one time, and it is reproduced across the system.
Could-based AMS software is backed up and protected in case of a disaster like theft or tragedy. It also upgrades automatically, so your software is always up-to-date and your operations uninterrupted.
A cloud-based AMS database syncs with member profiles so association managers can complete tasks and access information whenever they need it. Simply put, an effective AMS and its database allow association management companies to grow faster and accomplish more with less.
Who Should Prepare HOA Accounting Reports?
Every HOA must keep accurate financial records to allow for the preparation of useful accounting reports. These reports deliver transparency to homeowners, help the board create a realistic budget, and satisfy banking, tax, and legal requirements.
An HOA can elect a treasurer to self-manage the association’s financial records, and he or she can prepare reports. In the hands of someone without accounting experience, however, even simple financial statements can contain errors.
The board may opt to hire an accountant to maintain the books and prepare the reports. If an association management company handles the HOA’s daily operations, the management company will also prepare the statements.
HOA accounting reports can be produced monthly, quarterly, or annually. Variables that help determine report frequency include:
No matter who prepares the HOA accounting reports, using the right software is pivotal. CINC’s accounting software offers integrated banking features and repetitive task automation. These tools increase transparency among board members, residents, and the management company through timely, accurate, and frequent HOA accounting reports.
Where Should the HOA Accounting Reports Go?
Error-free and detailed accounting reports are an indicator of an HOA’s financial health. Homeowners’, condo, and community associations of any size can benefit from CINC accounting software to prepare and automatically submit accounting reports to the following three entities:
An HOA’s board of directors should be given complete accounting reports. The board must have access to accounting details to:
When residents see where their dues payments are going, they possess greater trust and satisfaction in the HOA and are more likely to involve themselves in its operation.
Some sensitive personal information can be kept private, but in general, the more accessible and detailed the accounting reports are, the better.
CINC’s online portal offers community members immediate access to association documents and a two-way communication platform where they can ask questions and provide feedback.
Most states have laws requiring non-profit organizations like community associations to keep comprehensive financial records and report them regularly to their Secretary of State or equivalent state department. If an HOA does not comply with state and local regulations by submitting accounting reports, it could have its “good standing” certificate revoked.
Top 4 Tips for Using an Integrated Banking System
An HOA manager is tasked with administering the finances of the association. This process can be error-prone and time-consuming if performed manually, but an integrated banking system could be the solution your company needs to simplify and optimize association accounting.
To ensure you are getting the most out of your community management software, follow these top four tips for using an integrated banking system:
HOA Account Managing vs. Self-Managing
HOA management requires either of the following two options:
Although it may seem like the latter option will save money, there are other factors to consider. Community volunteers sometimes lack the knowledge and time to effectively manage the association, which means self-managing could cost the HOA more money in the long run.
To make this decision, look at the big picture and ask yourself: Are you and your co-board members comfortable dealing directly with all of the following issues?
Association management companies, on the other hand, can bring:
Why an HOA Needs a Management Company
Most HOAs are classified as non-profit companies, with bylaws and declarations that require a board of directors. Board members are community volunteers who likely don’t have the 20-plus hours needed every week to oversee the HOA’s daily operations.
A management company can commit full-time attention to a community association because it is their job. They work to ensure property values continue to climb, and residents’ needs are met.
When you elect to hire an HOA management company rather than self-managing, you can expect these advantages:
Top Responsibilities of an HOA Management Company
An HOA management company is responsible for managing the HOA’s day-to-day operations. The board of directors makes decisions for the association and then hires a management company to implement their vision.
All parties must understand the HOA management company’s responsibilities, so obligations don’t slip through the cracks. Frustrated homeowners could be left wondering who to contact with their questions.
HOA management is not a one-size-fits-all arrangement since every association has unique needs. Yet some responsibilities are commonly undertaken by HOA management companies:
In all of these areas, the HOA management company acts as an agent of the HOA board and is the homeowner’s primary contact for any HOA issues.
Association Management’s Role in an HOA Board
When an HOA board hires a management company, the roles of each party can be confusing. Let’s consider the association management’s role in an HOA board and how it can benefit a community association.
The HOA board and association management’s functions include community building and business operations, but each party achieves its objectives differently. The HOA’s governing documents define these roles.
The responsibilities of an HOA and its board members include:
Community association management companies are responsible for the following management areas:
Companies that utilize community association management (CAM) software from CINC can deliver unmatched accounting solutions, site management, administrative services, and AR/AP oversight, and site management for their clients.
Which HOA Violations Should an Association Management Company Enforce?
The HOA board is ultimately responsible for maintaining community standards, but board members often hire an outside association management company to be the rule enforcer. The management company will likely be charged with visiting the community to monitor compliance, sending notices to homeowners in violation, and assessing and collecting fines.
Each HOA-governed community has its own rules and guidelines for how community regulations should be enforced. These can be found in the organization’s governing documents. The bylaws contain procedural rules for how laws can be added or changed, while the CC&Rs list all regulations currently in effect.
Common HOA violations enforced by the association management company include:
CINC Systems’ community management software includes a dedicated violations module with features to help meet needs specific to an HOA condo manager. Maintain violation documents and photographs in one easy-to-access location and automate repetitive tasks like fee calculations and homeowner notifications.
Sending a Homeowner to Collections
Homeowner assessments are the bedrock of an HOA’s budget and cashflow. If a resident doesn’t make HOA payments on time, the association may need to send the delinquent account to collections.
The collections process is generally not beneficial for either the homeowner or the HOA. The homeowner could endure damage to his or her credit report and a lien against the property. The association often gets less money than is owed and loses the trust and goodwill of the resident.
Consult with state laws and the HOA’s bylaws and CC&Rs for other avenues to collect. These may include:
Give homeowners 90 days or more to remedy the situation before involving collections. If they respond to notices with defiance or anger, they are not as likely to voluntarily pay. If they are not making any payments at all or have stopped responding, it may be time for collections.
Maintain a positive relationship with homeowners by providing a flexible system for accepting payments. Use an HOA website portal for convenient online options. CINC Systems’ software also includes a collections module that automates communications and integrates collection agency data for real-time updates on delinquent accounts.
Association Management and Vendor Relationships
Strong vendor relationships are essential for your association management company and the HOAs you serve. A lot of logistics and planning go into keeping the communities secure, safe, and clean. Choosing and retaining the right vendors can make a substantial difference in work performance, cost, and quality.
Use CINC Systems’ software to solidify vendor relationships with more accurate data entry, faster payments through automation, improved communication thanks to HOA website portals, and streamlined invoicing and tracking. Maintain healthy HOA vendor relationships to keep your management company and the communities you serve at the top of their client list.
Association Management and HOA Audits
Association management companies should perform audits to review an HOA’s financial records at least every few years. State law and the association’s governing documents often require this. Even absent these mandates, an audit may be necessary:
Certified public accountants (CPAs) can assess an HOA’s financial health by gathering statements for compilation inspections, reviewing documents and methods for GAAP (generally accepted accounting principles) compliance, and performing a full audit.
Audits should be performed by independent CPAs not employed by the HOA. This is the most extensive type of financial examination, and it involves three steps: risk assessment, fieldwork, and preparation of an audit report.
Association managers should also consider annual audits of other community management processes. Board procedures may need to be changed to adhere to new laws, and homes with new owners could have out-of-date contact information that needs to be updated.
HOA management companies that run annual checks using CINC Systems’ accounting software can be confident they have the required procedures and information to stay in compliance and operate efficiently.
Advances in technology have made scalability and growth more accessible for association management companies, but you need scalable resources and structure to achieve manageable growth. Put flexible systems in place that can scale along with your company. In this way, your business will be able to efficiently and profitably handle a more extensive portfolio.
Utilize technology that will relieve growth pressure and adjust to your changing needs. CINC Systems’ SaaS CAM software removes the need for physical files, on-site computer servers, or software infrastructure ownership.
Also, CINC lets you manage numerous HOAs with one instance of software and no user capacity constraints. Multiple HOAs can use the system at once, with no effect on speed or usability.
CINC’s software has self-contained modules that you can add for maximum scalability as your company grows. CINC’s all-in-one cloud-based system also includes automation, allowing your HOA managers more time to focus on value-added activities.
CINC’s software modules that can be added to your platform include:
CINC frees you to scale profitability without adding staff. Implement scalable software to give your team enough bandwidth to manage twice as many associations.
To experience CINC for yourself, fill out our online form for a free demonstration.