9 minute read
Funding for the Future: Why Financial Forecasting Is Essential for HOAs
from Echo Journal – Issue 3 2022
by Echo
FUNDING
FOR THE FUTURE
FUTURE
WHY FINANCIAL FORECASTING IS ESSENTIAL FOR HOAs
BY DAN STONDIN
On June 24, 2021, at approximately 1:22 a.m. EDT, Champlain Towers South, a 12-story beachfront condominium in the Miami suburb of Surfside, Florida, collapsed. Ninety-eight people lost their lives. Only six years earlier, in Berkeley, California, a balcony collapsed and killed six students who were celebrating a 21st birthday shortly after midnight. While many factors contributed to these tragedies, deferred maintenance and inadequate inspections of community-owned property played a significant role. Bills and new laws like California SB 326 / CA Civil Code 5551 and SB 4-D in Florida aim to bring more physical checks and financial oversight to HOAs and their management teams. And it’s not just the government becoming more aware of the dangers of poorly maintained physical and financial HOA assets. This year, Fannie Mae and Freddie Mac, two of the most prominent players in the mortgage market, added a new questionnaire to condo loan applications. This addition will likely protect them from purchasing loans on potentially dangerous buildings. A positive side effect for homeowners may be that it generates demand for a higher standard of condo care and management across the country.
Board members have an invaluable role to play alongside these new laws to ensure that their communities are desirable and safe places to live. Building maintenance is complex and expensive, and saving for longer periods of time while deferring replacements is a recipe for disaster.
Continued on page 16
Funding for the Future Continued from page 15
More often than not, HOAs inherit mistakes, and many start at a disadvantage. The initial “plan” prepared by developers and submitted to the California Department of Real Estate isn’t always as thorough or accurate as the one often required by law three years later. Assessments are unfortunately kept artificially low in the first year to encourage property sales and are rarely corrected until it’s too late to get back on track quickly. Another factor contributing to high-risk HOAs is continuing to operate against a once-accurate plan. California law requires that HOAs conduct a visual study of the entirety of an association’s components every three years and produce a financial update every 12 months in an attempt to stay on track. These reserve studies are a snapshot of the health of an association and include a plan for collecting and spending association funds over 30 years. Unfortunately, we all know life rarely goes as planned; things break before the anticipated replacement date, materials and labor cost more than expected, and out of left field, inflation skyrockets because of an unimaginable global pandemic. Forgetting, or simply not conducting, these essential revisions to an association’s long-term savings plan can lead to dramatic assessment increases and significant special assessments.
A common goal among HOAs is to be “100 percent funded.” While this is a fantastic ambition, it is unrealistic for many associations. A more attainable goal might be to have a strong reserve, where the likelihood of large special assessments is low. There is a shared opinion in the reserve analyst community that funding above 70 percent can be considered strong, and anything below 30 percent should be regarded as weak. The term “100 percent funded” is often mistakenly interpreted as being the amount required to replace all commonly owned components at once. In fact, all components begin to deteriorate after they are installed, each with a life expectancy and associated replacement cost. For example, an analyst might estimate a condominium roof to last 25 years and to cost $250,000 to replace. An HOA must save $10,000 each year in preparation for its replacement. In reality, it’s not exactly $10,000 a year, because inflation has to be accounted for, but for simplicity’s sake, it’s ignored in this example. If applied to all components in the community, this same saving principle would result in the association being 100 percent funded each year even though the total replacement costs for the components haven’t yet been collected! Instead, associations tend to ensure that they have enough money saved each year to cover the replacements in that year while saving as much as is socially acceptable for the future. It’s literally a balancing act, and equilibrium is difficult to attain without financial forecasting tools or expertise. While this method can work for years with few or inexpensive replacements, it quickly breaks down when multiple or significant expenses are due.
Do HOAs need financial forecasting software? Absolutely. For-profit companies use tools like these and rely on them to ensure that their business can continue to pay salaries, keep up with operating costs, and save for the future. Sound familiar? Running “what if” scenarios is a fantastic way to avoid surprises and present options to a broader audience, reducing the decision-making burden for individual board members. Humans are innately visual. It can be complicated to glean meaning from competing tables of financial information unless the objective or answer is clearly defined. Many financial forecasting tools communicate the same information through data visualizations or derived insights.
All the data needed to generate financial models and forecasts are locked up but available in an association’s reserve study. These studies and the suggested plans are incredibly valuable but often challenging to implement. Board members are not experts and, by law, are volunteers; even reviewing upcoming replacements and kicking off projects can be difficult. Simple calendar reminders can go a long way. Why not try “Alexa … remind me to review
ongoing and future HOA replacement projects each month.” Simple project management software, by design, typically requires someone to be assigned to or lead projects. This sounds obvious, but unless things are made explicit, HOA board members can quickly lose track of who is supposed to be doing what, and replacements can fall through the cracks.
Considering that 53 percent of the U.S. population lives in homeowner associations, and 60 percent of condos in the U.S. are now over 30 years old and haven’t been adequately funding their reserves, a storm is on the horizon. When a community reserve is underfunded, one of the only tangible ways to get back on track is to levy a special assessment on its homeowners. While the term “special assessment” carries many negative connotations, it can be a very effective tool to improve an association’s financial health quickly. The problem most people have with special assessments is usually less about the finances and more about the homeowner’s shock that a special assessment is necessary in the first place. Why now? Why didn’t we know about this sooner? Who came up with this assessment figure? Using software can reduce the shock factor and answer such questions by presenting the effects of inaction to improve an association’s financial situation.
Transparency, regular monitoring, and effective communication methods that engage and inform homeowners makes them much more likely to appreciate and empathize with the HOA board in challenging times. While getting out of a financial hole is essential, avoiding getting into one is a much more effective way to operate. Responsible board members must often make difficult and unpopular decisions, but the consequences of not making these decisions can be devastating.
Dan Stondin, CEO of homey.io, is a product designer and entrepreneur who works with homeowners’ associations and their board members to elevate technology and unlock the true value of being part of an HOA. Dan knows that software can simplify and support the duties performed by thousands of volunteer board members. He has founded successful technology companies and helped build cutting-edge software for over a decade.
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CHRISTISON COMPANY
Our formula for success in community management is simple: We treat people right.
Our philosophy is simple: we believe in quality, service, performance, uncompromising integrity and taking responsibility.
Christison Company is a full service CID (Common Interest Development) management and consulting firm. Our office in Pleasanton, California has three in-house departments staffed with professionals specializing in areas of association operations and management. In-house departments include: Management Services, Financial Services, and Projects & Maintenance Services.
Originally, Christison Company had its roots in the public sector consumer interests of the common interest development industry. Our founder, Douglas B. Christison, was one of the original founders of Echo (Executive Council of Home Owner), established in 1973 by volunteer directors of homeowners associations. Mr. Christison was elected as Echo’s first President and first Executive Director. Later, in 1976, Mr. Christison was appointed by Governor Jerry Brown’s administration to serve on the Department of Real Estate’s (DRE) Subdivision Advisory Committee.
Today, Christison Company is one of the most respected companies in the industry thanks to our simple formula of treating people right. At Christison Company we all share the same core principles of integrity and high ethical standards.
Over 41 years of experience managing community associations enables us to provide the management experience and professional abilities that your community deserves. With our commitment to excellence and service, we are certain we will meet your needs, consistently, today and in the future.
We take pride in providing superior customer service to our boards and homeowners every day. We value every one of our associations, respect their unique needs and desires, and offer personal care each community deserves!
We offer comprehensive and tailored management services, including but not limited to: • Management • Financial • Maintenance • Consulting • Builder & Development • Governance • Website/Online
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Please feel free to contact us at your earliest opportunity at 925-371-5731. We would be happy to schedule a meeting with your board of directors to share how we can help you with the day to day stress of community management.
