Understanding Homeowners’ Association Budget and Assessments
Planning out an HOA budget is a marathon of a task. As a homeowner, trying to understand it can be even more difficult and frustrating. The more knowledgeable you are about how an HOA budget works, the more power you’ll feel in the budgeting process. Keep reading to learn more about HOA monthly assessments, special assessments, annual budgeting, and your board’s decision-making process.
Homeowners’ association budgeting
Before the budget is submitted to the homeowners’ association board, the board must gather all appropriate documents. They must evaluate all necessary contracts are in place and check if any of the expenses have increased. Next, bills like your electric, gas, insurance, and water are checked to see if they need to be adjusted as well. They must enter all the new numbers into a new budget.
After the board finalizes the budget, they are required to mail it to members 10-30 days before the meeting at which they will present it. At that meeting, the budget will be up for discussion during open forum. The board will consider homeowners’ concerns, but ultimately the board has the final say as to budget approval. Remember, they are elected to make decisions for the association.
Ensuring your board is making the right decision starts by understanding the association’s reserves. An HOA needs a reserve fund in order to maintain financial health (e.g., in the event of a sudden emergency spend). Also learn the year of the building, and if there are any major projects needed for maintenance or improvement. Big projects like tuck-pointing, roofing, solving foundation issues, landscaping overhauls, and driveway re-dos can cost a lot of money.
Special and monthly assessments
Let’s answer some key questions to understanding your monthly assessment fees.
1. What is an assessment fee?
HOA fees, also known as assessments, are paid by homeowners every month. A monthly assessment is either based on a percentage of ownership, or an overall number divided equally among everyone in the association. The number is roughly based on what other associations around the area may have their assessment set at, or on what the property developer projects monthly expenditures to be.
2. What is the special assessment (i.e., capital assessment) definition?
The purpose of a homeowners’/condo association special assessment is only to pay for specific projects. It is the board’s role to describe the project in detail to the homeowners ahead of time. A capital assessment can have a timeline as short as a month or as long as several years. For example, a special assessment is in order if the board decides to install new windows in every unit. Windows are expensive, so the board may decide to implement a three-year special assessment. Over the course of the three years, owners pay an additional monthly amount until those three years are over. Once the special assessment is paid for, the assessments drop back down.
3. Can you claim HOA fees on your taxes?
While you can claim the interest on your mortgage and property taxes at tax-time, you cannot claim monthly assessments. The exception to this is if you are renting out your condo or townhome, in which case costs associated with the residence are deductible.
4. Do HOA fees ever go down?
The answer to this question lies in the differentiation between your regular monthly assessment and a capital assessment. Your monthly (or quarterly) fee is a total of both components. The regular assessments will never go down. This HOA fee increase is due to inflation, and costs such as maintenance increasing over time. Expect an HOA fee increase as frequently as annually. If an HOA is not increasing it at least every now and then, they are likely to end up with an unhealthy financial situation. However, capital assessments are temporary. Once the fee schedule completes, this fee will go away (until another capital project is approved), leaving your total assessments to decrease. The key here is to understand capital assessment payment schedule.
5. Is there an HOA fee increase limit?
Check your association CC&Rs, as some older properties have an HOA fee increase limit. Some states may also have a limit. But, in many cases, there is no HOA fee increase limit.
Importance of paying assessments
There are many reasons why it’s important to pay monthly assessments, including:
- Enhancements around your community require funding. The board cannot make the improvements if owners aren’t paying their HOA fees. Over time, the result of unpaid assessments may be that your building looks shabby or you lose amenities due to disrepair.
- Without monthly assessments, it will be impossible to continue contractual work with vendors since the association would not have the funds to pay your monthly bill.
- A lack of assessments could also result in your utilities being shut off due to unpaid bills.
Financial matters are an emotional trigger for almost everyone. As a result, homeowners can feel powerless and frustrated when HOA assessments change when they do not have a full understanding of why, or if they had say in the matter. The board makes these decisions based on increased expenses, bills, and projected enhancements.