Avoid these association financial traps and pitfalls

Associations are run by boards.  They are legally responsible for their property’s governance and long-term financial health.  And these boards are volunteer homeowners that can face big demands and challenges.  It should be no surprise they face behavioral pitfalls, which can affect anyone.

Out of sight and out of mind = Masked liabilities

All homes within associations are subject to special assessments.  These are extra expenses outside of regular dues to tackle important situations.  Yet, special assessments are often bad surprises that can create financial distress. Unfortunately, this was the reality for homeowners in a North Bay community.  Each individual owner faced a $145,000 special assessment.  These stories are more common as properties age and costs continue to escalate.

Masked Liabilities  =  Financial Shocks  =  Special Assessments

Critical factors compound to create bigger problems

Many associations don't realize how long-term obligations grow over time.  Boards often avoid increasing dues without realizing that they are creating bigger obligations.  When these obligations come due there’s little ability to postpone the expense.  Also, the reserves funds that have been set aside are inadequate.  Thus, putting off these expenses adds hidden cost and risk. This puts boards, managers and owners in difficult situations.

  • Low dues:  Contributions aren’t enough to cover long-term costs
  • Critical misses:  Large expenses aren’t even on the radar  
  • Funds fall behind:  Long-term saved monies are losing value
  • Cost acceleration:  Total expenses are even growing faster

Typical behaviors create the unintended consequences

Volunteer board members are responsible for the association’s financial health.  It isn’t easy serving on a board.  Often without the tools necessary for long-term financial and fiduciary management.  There is no manual, and there are untold risks.  Managers also often have the same challenges needing access to information and tools.

  • Near-term view:  Trade-offs down the road aren’t understood and corners get cut
  • Reactionary:  Lack of time or not being proactive, puts off important issues
  • Unfounded assumptions:  Critical information is missing and not sought after
  • Group think:  Social pressure conflicting with association obligations

Financial health needs ongoing information and objectivity

Again, association boards are not trying to do the wrong things.  They unfortunately suffer from lacking the ‘what’ and then the ‘so what’.  On-going information at the right times enables good decisions.  It also provides the objectively that combats the typical behaviors hurting associations.

To Summarize

Associations and their boards want to do the right thing.  But it can be hard to fix what isn’t known to be broken.  Information and objectively enables the best long-term financial decisions.