How Can My HOA Handle Inflation and Recession?
As inflation has affected our daily lives, including grocery shopping and other living expenses, it has also impacted our HOAs. In addition to this fiscal strain, economists are anticipating a potential upcoming recession. With all this financial uncertainty, how is your HOA impacted and how can you prepare?
The Impact of Inflation
Inflation affects HOAs by increasing property values, government taxes, and fees, along with maintenance costs. Repairs and replacements are more expensive, reserve funding becomes out of date, and costs associated with utilities, vendor contracts, labor, materials, and insurance go up.
Additionally, a recession could cause homeowners to be unemployed while their living costs continue to rise. This can result in an increase in non-payment of assessments, which makes it more difficult for the HOA to keep up with the rising operation costs.
Plan Properly for Rising Costs
The best protection against inflation and recession is to equip your association with a strong, flexible budget.
First and foremost, start preparing the budget early. Thoroughly review each line item and make sure to adjust for inflated costs for repairs, maintenance, vendors, and other items that should be increased. Including a bad debt line item for potential delinquencies, foreclosures, and other liabilities can help prepare the HOA in case those liabilities occur.
Another item to increase the budget for is to fund the reserves. The reserve fund covers emergencies and capital expenditures, such as major repairs and replacements, and reserve studies are conducted to calculate the amount that should be in your HOA’s reserves.
However, inflation will make the reserve study outdated since increased property values will make repairs and replacements more costly. A good practice is to update your reserve study every three to five years, and a reserve specialist may be able to update the amounts in between studies to account for inflation and recession.
Also, make sure to increase the budget for any needed increases in insurance coverage. With inflation and recession, insurance appraisals become outdated, so it’s important to update appraisals to reflect the increased property values.
Adjust to Your New Budget
To accommodate for the increased budget, you may find that you need to increase the HOA’s assessments. Increasing them to fund the adjusted budget and reserves will help avoid having to defer maintenance or levy a special assessment. But, take into consideration the possibility of higher delinquency rates that may come with higher assessments.
Ultimately, make sure to communicate the increase with homeowners to give them proper time to prepare for the change. Also, consult state law and the HOA’s governing documents for any limitations and requirements when raising assessments.
In addition to increasing the budget and assessments, the association can minimize spending, where possible. Prioritize urgent expenses and reconsider costs associated with desires or aesthetics only. Strategize community projects by reviewing vendor contracts, being flexible with timelines, and researching alternative materials to see if there are other viable, more cost-effective options.
However, cutting too many costs or opting to defer needed maintenance can lead to worse consequences. Deferring maintenance can decrease the lifespan of assets and require replacement sooner. Additionally, tragic consequences may occur if assets become unsafe without maintenance. Opting to not perform needed maintenance can cost much more in the long run.
Alternatively, make sure to update the maintenance budget as needed, establish a preventative maintenance schedule, and monitor operations and safety regularly. Also, by adequately funding your reserves, you can prevent having to defer important maintenance.
For more information about navigating HOA finances, check out our new Bookkeeping Basics course!
