common hoa budgeting mistakes for their reserve account
TRANSCRIPT
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Reserve Study Presentation: Common HOA Budgeting
Mistakes
Joel L. Tax, RS PRAReserve Specialist
[email protected](866) 574-5115 ext. 704
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1. Inaccurate component list
2. Looking to the past to predict future projects
3. Ignoring inflation – assuming interest has a greater positive impact
4. Not regularly increasing the reserve allocation amount
5. Doing Nothing!
Common Budgeting Mistakes
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By far the #1 reason we see Clients struggling with reserve budgeting is that they have an incomplete component list.
1. Inaccurate Component List
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If the component list and their associated costs are not known then adequate budgeting is not possible.
1. Inaccurate Component List
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2. Looking to the past to predict future projects
Buildings do not age gracefully!
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2. Looking to the past to predict future projects
What is seems to be random to a Client is often just another day at the office for a knowledgeable professional.
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3. Ignoring Inflation• Inflation impacts total
cost of replacement for all components.
• Interest earned only impacts the actual reserve account balance.
• 3% compound inflation equals a doubling of costs every 23.5 years!
Impact of Inflation
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3. Ignoring Inflation - Interest vs. Inflation
Reserve Account Balance: $100,000 Replacement Costs : $1,000,000
1% Interest Earned / yr. 3% Inflation / yr.
= $1,000 Earned - Positive Impact = $30,000 Additional Funding Needs – Negative Impact
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3. Ignoring Inflation - Offsetting
I D E A
• Offset the impacts of inflation with regular annual increases to the reserve account allocation rate.
• This typically requires a regular increase to the allocation rate. Annual increases are most fair to the current and future members of the community.
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Annual increases are most fair to the current and future members
4. Not regularly increasing the reserve allocation rate
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Every year the allocation rate does not increase to offset inflation budgeting will get more difficult.
4. Not regularly increasing the reserve allocation rate
*Assumes $1,000,000 in component costs*
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Ignoring an underfunded reserve account has no impact on the outcome as the project costs will still occur!
5. Doing Nothing!
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Avoid These Common Mistakes to Prevent Missing the Target
1. Creating an Inaccurate Component List – Hire qualified professionals.
2. Looking to the past budget to predict future projections – Buildings do not age gracefully – more of the building will need to be replaced with age.
3. Ignoring inflation / assuming interest has a greater impact - inflation impacts the total cost of all components – interest is only earned on the amount actually in the account.
4. Not regularly increasing the reserve allocation rate – the budget needs to offset the significant impact of inflation and regularly – annual increases are most fair.
5. Doing Nothing! Deterioration to common areas works against a reserve budget 24/7 – 365 days a year.
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Do you haveany questions? ???Joel L. Tax, RS PRAReserve [email protected](866) 574-5115 ext. 704