How to Prepare an HOA Annual Budget From Last Year's Books

What is an HOA budget?

An HOA budget is the board's plan for one year. It lists the operating costs, the contribution to reserves, and the dues that pay for both.

The budget has 2 parts. The first is the year's running costs: landscaping, insurance, management, utilities, repairs, office. The second is the money set aside for major repairs, the reserve contribution. Dues come out of the 2 together. The budget is the first step of the yearly cycle in HOA accounting explained for board members.

What are the steps to prepare an HOA budget?

6 steps: pull the last 12 months from the books, set the reserve contribution, budget each operating line, calculate dues, review the draft, and adopt it.

1. 1Pull the last 12 months of actual income and costs from the books, line by line.
2. 2Set the reserve contribution from the reserve study.
3. 3Budget each operating line from its actual cost plus the changes you already know about.
4. 4Add the 2 parts, subtract other income, and divide by the number of homes and by 12. That is the dues.
5. 5Review the draft against the checklist below.
6. 6Adopt it at a board meeting and tell the owners.

A common habit is to take last year's budget, add a percentage, and leave reserves as whatever is left. The 6 steps start from what was spent, not what was planned, and set the reserve line before anything else.

Where does the reserve line in an HOA budget come from?

It comes from the association's reserve study, which gives a contribution for the year. Divide it by 12 for the monthly transfer. Set this line first, before the operating lines.

Demo Ridge HOA's reserve study gives a contribution of $50,400 for the year. Divided by 12, that is $4,200 a month, the amount moved from the operating account to the reserve account each month. We type the study's figure in; we do not set it. Which numbers come out of the study is in the HOA reserve study and the books. How the monthly transfer is then recorded is in HOA reserve fund accounting.

How do you budget HOA operating costs from last year's books?

Start each line from what it cost over the last 12 months. Then adjust for what you already know: a new contract price, an insurance renewal quote, a one-time cost that will not repeat.

Here are the 6 operating lines at Demo Ridge HOA: what each cost over the last 12 months, the change the board already knows about, and the budget that comes out.

Operating lines at Demo Ridge HOA, invented data

A known change is a new contract price, a renewal quote or a one-time cost that will not repeat. A line with no known change keeps last year's actual, as management does here.

How are HOA dues calculated from the budget?

Add the operating budget and the reserve contribution, subtract any other income, then divide by the number of homes and by 12. $252,000 for 60 homes is $350 a home a month.

In words: operating budget, plus reserve contribution, minus other income, divided by homes, divided by 12. At Demo Ridge HOA: $201,600 plus $50,400 is $252,000, and other income is $0. Divided by 60 homes, $4,200 a home a year. Divided by 12, $350 a home a month. Of that, $280 goes to operating and $70 to reserves.

Dues are split equally in the sample. Some governing documents split them by ownership share instead, so each home pays its share of the same total.

What does an HOA budget example look like?

A 60-home association budgets $201,600 for operating costs and $50,400 for reserves. The total is $252,000 a year, or $21,000 a month.

The full budget at Demo Ridge HOA, invented data

The same layout, ready to fill in, is the HOA budget template.

What should a board check in an HOA budget review?

Check that every line ties to last year's actual or a signed quote, that the reserve line matches the reserve study, and that dues times homes times 12 equals the total.

8 checks for the board member who reads the draft before the vote:

• Every line ties to the last 12 months in the books, or to a signed contract or quote.
• The reserve line equals the reserve study's figure.
• Insurance uses the renewal quote.
• One-time costs from last year are taken out.
• There is no large "other" line.
• Dues times homes times 12 equals the total.
• The budget is split by month.
• The draft says what changed from last year and why.

At Demo Ridge HOA, check 6 reads $350 times 60 times 12, which is $252,000, the total of the budget.

How is an HOA budget approved?

The board adopts the budget at a meeting. Notice periods, owner votes and limits on dues increases are set by state law and the governing documents, a question for the association's attorney.

We prepare the numbers and the note on what changed. The board reads the draft, asks its questions, and adopts the budget. The adopted figures then go into the books as the plan for the year.

What happens after the HOA budget is adopted?

Split the budget by month and compare it with actual income and costs in every monthly report. A line that runs over gets a note.

At Demo Ridge HOA the operating budget is $16,800 a month. In the sample month the bills came to $15,900, so the month was $900 under budget, and the report says which lines made the difference. An apartment building's version of that monthly comparison is in budget vs actual for an apartment building.