Whether at the grocery store or on the news, you’ve likely heard and felt the impact of this year’s inflation. With costs steadily rising, it is important that HOAs prepare ahead of time to avoid their community running into financial trouble. Below, we’ll cover some of the impact inflation can have on your community and some steps that boards should consider to keep their HOA financially protected.
Rising Costs and Supply Chain Issues
If you’ve recently renewed a contract with a vendor or inquired of the cost of a project, then you probably already noticed that the cost of services has increased. Then, when going ahead with a project, you might have experienced delays in the project being completed.
Both inflation and supply chain issues are impacting labor-heavy services that are needed by HOAs to successfully run the community, like pool management, general maintenance contractors, landscaping, and other service vendors.
In addition to the extra cost associated with vendors, your HOA should also anticipate the increasing costs of insurance and utility.
Take a Proactive Approach
The best way to protect your association financially is by being proactive. Below, we’ll cover the steps we recommend for making your community inflation-proof:
Start Next Year’s Budget Early
When drafting a yearly budget, there are several factors to consider, especially when inflation is on the rise. By starting budget planning early, you allow yourself more time for obtaining bids for any anticipated capital improvements, allow homeowners time to prepare for any assessment increases, and ensure that the process runs smoothly.
If the increase of costs is putting pressure on your association’s bottom line and reserve contributions, then an assessment increase may be necessary.
Whenever an assessment increase is needed, we recommend taking the extra time to prepare your community. By starting the conversation early, you can allow the homeowners in your community time to prepare for the impact an increase will have on their personal budget.
Be Strategic with Community Project Plans
While rising costs may make the idea of any community projects seem less desirable, you can increase your chances of sticking to your budget by approaching any project strategically.
When planning your project, be flexible with your timeline of when you want it completed. Vendors may be cheaper during “off-seasons” for the type of project that you need. By allowing more time for the vendor to complete the project, you can avoid any additional charges for rushed services.
Also, take your time to research. While you may have your heart set on a certain type of material for the project, there may be an alternative available that is similar in quality, but at a lower price.
Update Reserve Studies
Reserve studies are vital for each association as they are the financial forecast for your community. While reserve studies often factor in inflation, in recent years it’s only factored in about 1-3%, which is low compared to the inflation experienced today.
Because of this, your reserve study may need to be updated to account for the higher rate of inflation, which is projected to increase over the next couple of years. Some companies will update your reserve studies at no cost or at a lower cost than a full replacement study.
We recommend reviewing your reserve study prior to planning your next year’s budget to see if an update to your reserves is needed and to see if your association needs to be contributing to more to your reserves to stay on track.
Consider Loans and Financing
If your association is already struggling to stay on budget, then there are other options available that can help alleviate some of the financial pressure.
If you have any unexpected maintenance that your community can’t afford or if your association is low on operating funds, then a microloan may be a great solution. Microloans can help offset your costs and help your community stay afloat.
Another thing that may help your association is premium financing. A high insurance premium payment can jeopardize any budget to get off track. With a short-term loan, you can break up the large payment to pay it over time, helping spread out your payments and improving cashflow. We recommend reaching out to our partners at Mintfish Premium Financing for more information.
Update Insurance Appraisals for Accuracy
Statements of value tell the insurance company how much your property is worth. If this number is inaccurate or outdated, then your property will not be fully covered by your insurance policy. Due to inflation, costs of replacements and repairs for community property have risen, which means that your current estimated values may currently be inaccurate.
By getting an insurance appraisal, you can ensure that the value you are providing to your insurance company is accurate and is updated to account for inflation.
We hope that these tips help your association stay on budget while navigating inflation. If you have any questions regarding your association’s finances, we’re always here to help! Reach out to us at Spectrum today or check out our knowledge base for more information.