HOA Accounting 101
Property management accounting is incredibly nuanced (it’s why we’re in business!), but when it comes to successfully managing an HOA, there are a handful of differences all property managers should consider for maintaining the financial health of their HOA, or if they are considering adding an HOA to their portfolio.
January 24, 2022
The HOA: Here to Stay
Like anything, there are pros and cons with owning, running, or belonging to an HOA: on one hand, a well-run homeowner’s association can increase the value of a property by as much as 4.2%, on the other hand, a mismanaged HOA can become an angry mob of homeowners, particularly when there isn’t enough cash on hand.
There are currently more than 370,000 homeowner associations in the United States, representing about 40 million households—more than half of owner-occupied homes! This year, the number of community associations is projected to increase 1.3% with 4,500 new communities expected, bringing the market revenue of the HOA industry to a whopping $33 billion.
HOA Accounting: The Broad Strokes
Accrual Basis accounting is generally preferred for HOA accounting. Revenue and expenses are recorded immediately, even if money has not been exchanged. This gives the most complete and accurate picture of HOA finances, conforming with Generally Accepted Accounting Principles (GAAP).
In addition to understanding the usual suite of accounting financial statements (balance sheet, cash flow, profit & loss), HOA accounting experts prepare the association for maintenance, repairs, homeowner bankruptcy, or even financial malfeasance.
Accounts receivable are generally the same but where apartments pay for maintenance, rehab, and remodels on their building(s) and property, this is the individual homeowner’s responsibility. The HOA pays for common area maintenance, meaning fewer accounts payable transactions for things like pool cleaning, landscaping, and parking. Money-in includes fees and assessments; money-out includes common area maintenance.
HOA Boards: Mysterious like Illuminati, Powerful as Freemasons
Homeowners under an HOA are responsible for their own property. But, for shared property (including shared walls and the pipes inside them), common areas, neighborhood signs, and amenities, someone needs to represent the collective interest. To that end, an HOA board is elected to represent homeowners, manage the budget, enforce rules and regulations, and oversee administrative tasks.
HOA board members are volunteer homeowners from within the community and are not paid. They pay dues and assessments just like everyone else. Since board members have a significant impact on the community’s well-being, they have an additional fiduciary responsibility to act in the interest of homeowners.
Some duties seem simple from the outside, but there’s a lot of administrative heavy-lifting that maintains a healthy community. Most HOA boards bring in a property manager to assist with day-to-day operations. The property manager works closely with the HOA, but ultimately the board retains decision-making power.
Along with overseeing finances, the HOA board sets dues and assessments, collects and manages funds, and slaps fines on homeowners who break rules or damage common areas. Similar to a property manager, the board is responsible for funds, requiring insurance to cover liability, errors, and omissions.
One best practice for HOA financial management is segregating accounting duties. As volunteers, the board might not have experience with real estate management or complex financial issues and may benefit from outside property management and *hint-hint* expert accounting.
Member Fees: The Price for Cushy Amenities
Anyone who buys property within an HOA automatically becomes a member who agrees to abide by the rules and regulations and pay dues, known as HOA member fees. Typical fees are between $200 to $400 monthly, but depending on the neighborhood and amenities, fees can range from two to five figures.
Not too long ago, a gatehouse, golf course, or swimming pool attracted residents and raised property values. To attract a new generation of homeowners, associations are revisioning communities beyond the usual tennis courts, business centers, and holiday parties.
HOA fees can cover the cost of everything from basic recycling, landscaping and snow removal, to luxury dog parks, spas, valets and gyms, to uber-luxury on-site concierge, barista, fitness trainer, bellhop, and masseur services.
Assessments: The Price for the Unexpected
HOA fees also contribute to a reserve fund for renovations or emergencies. Accounting best practices report assessments as “liabilities” on the balance sheet. If an association lacks sufficient reserves for unplanned expenses to communal property, e.g., a broken water main or busted sidewalk, residents are charged an assessment to pay their equal portion.
Member Fines: No One Escapes the HOA
Homeowners who refuse to pay dues or comply with community policies are subject to fines, restriction of community privileges, litigation, liens, or even incarceration for so much as a landscaping violation. If non-compliance results in an HOA lien, it can be difficult or impossible to sell a home until cleared.
Keeping Your HOA Financially Healthy
Mastering HOA accounting means effectively managing fees and assessments. The particulars of HOA accounting may require ad hoc bookkeeping for assessments, or even supporting documentation in addition to the usual reports. An expert team of property management accountants can not only reduce accounting costs but free up your HOA board to focus on critically important stuff like trampoline colors and rose bushes. If that kind of time, savings, and expertise can benefit your HOA, drop us a line.