Avoiding Financial Frustration in Communities

How to Prevent Common Mistakes

By Lisa Elkan / Published August 2024

Community management companies and their local community boards are known for working together to create exceptional residential experiences. From maintaining landscaping and amenities to ensuring critical repairs and undertaking capital projects, there is a significant onus on them to not only ensure that resident assessments are well managed but also to ensure the communities are ready to weather any storm. 

     An association’s finances provide a snapshot into its health, its ability to rise and meet challenges, and ultimately its ability to function to its full—and often legal—potential. Unfortunately, there are instances where the financial health of the communities may be at risk or compromised. Among the most common best practices to avoid financial frustrations are the following: 

Adequate Bookkeeping

     Keeping an accurate record of financial transactions is a critical component of successfully managing a healthy community association. Not only does it help leadership keep an eye on cash flow, but it also determines where the money is being spent. Accurate bookkeeping also prevents fraudulent activity among individuals who may have access to the community’s funds. Similarly, property managers compare what they budgeted for expenses with actual expenses, which will allow a better understanding of the impact on the association’s bottom line. In the same vein, identifying potential issues with homeowners defaulting on payments and working with those homeowners will help prevent a shortage of operating funds. 

Budgeting Realistically

     Repairs may be expensive, especially as costs continue to increase. Realistic budgeting that takes into consideration price increases in labor, equipment, and other resources is critical to ensuring that anticipated expenses can be covered with the cash an association has on hand or can anticipate borrowing to make improvements to the community. Inaccurate budgeting, which most often occurs by simply copying past years’ budgets without looking into increases, may lead the way to a shortage of funds, special assessments, and other charges that are passed on to the residents. Good practices include cushioning projected expenses by three to five percent to ensure any unexpected hiccups along the way are handled. It’s also a good idea to itemize expenses. This will allow managers to identify exactly where money has been spent. 

Conduct a Professional Reserve Study

     Like financial reports that analyze the current state of the association, the reserve fund is an important tool to offset major repairs or maintenance in the future or to cover unanticipated expenses. Like the operating fund, the cash in the reserve fund comes directly from member assessments. It’s vital to conduct a reserve study to take stock of the condition of the community and anticipate the cost and timing of a potential repair or replacement. The study will also take a critical look at the community’s revenue, expenses, and reserve fund balance, which gives boards and property managers the chance to adjust as needed. Otherwise an underfunded reserve fund may obstruct major needed improvements to the property and may result in higher or special assessments to allow work to move forward. A flush reserve fund can also provide associations with the leverage needed to secure a low interest rate loan that may be paid back over time.

Refrain from Cutting Corners to Cut Costs

     As prices increase and labor rates spiral, cutting costs is at the top of everyone’s list, and community associations aren’t exempt. While it may seem like taking the least expensive bid is the most sensible budget-conscious decision, it may result in undertaking a more costly endeavor. Unqualified vendors, lower-grade materials, and rushed timelines may spell disaster for the bottom line as repairs or replacements then need to be undertaken again in months versus years. In everything it does, an association’s goals are to protect, maintain, and enhance the community.

Have a Team of Experts

     Sometimes community associations rely on the skills of board members, volunteers, and others to help with important functions from accounting and legal issues to community management and more. Unfortunately, a lot may slip through the cracks without hiring dedicated resources to help with the heavy lifting. While it may be less expensive to tap into willing volunteers, being equipped with a team of professionals from the legal, financial, accounting, and community management areas allows them to be laser-focused on the best possible outcomes for the associations. An attorney with association industry experience may speak knowledgeably and offer important counsel when dealing with challenging situations.

Provide Board Member Education—Roles and Responsibilities

     Having a board of directors is a crucial component for the oversight of the communities; however, many times board members do not have a clear understanding, and associated wherewithal, to operate successfully as part of the body. Arming and educating each board member with the background and expectations of the community will help them better understand their roles and responsibilities as board members and how best to fulfill them. A board’s governing documents typically lay out who can and cannot serve on the board as well as the qualifications of each individual who serves.

     An association is tasked with making big decisions for the health (and wealth) of its community. Understanding where common pitfalls lie may help them avoid costly mistakes and frustrations. 

Lisa Elkan

Vice President, Greater South Florida Region, Alliance Association Bank

     Lisa Elkan is a vice president for the Greater South Florida Region and joined Alliance Association Bank (AAB) in 2013. With a diverse background in banking, she offers the insight and industry experience relied upon by AAB for homeowner associations, condominium associations, and cooperatives.
     She began her banking career while still in college, working as a teller during her summers as a student at Iowa State University. After earning a B.B.A. in finance, she moved to South Florida, taking an auditor position with a commercial bank. Her work and interest in the bank’s investment and mortgages division would lead her to become a mortgage-backed securities trader for a capital markets firm.
     For more information, call 561-212-2091 or email lelkan@allianceassociationbank.com.