Cutting Costs – Without Cutting Corners Erasing the Red

Cutting Costs – Without Cutting Corners

As the 2012 federal legislative fiasco over the debt ceiling—as well as any number of other spending bills proposed since then—demonstrated, balancing a budget can be like pulling teeth. Balancing a condo or HOA community's budget can sometimes seem just as arduous—the task can be incredibly difficult because there are so many moving parts. Making sure that a building or association isn’t wasting money is even harder but budgeting a necessary part of running and managing a building community.

In the case of a condo or an HOA, cutting costs is one sure way to bring a runaway budget under control but cost-cutting comes with, well, costs. Cut too deep, and not only may a board face backlash from residents if services and amenities are reduced, but they may find themselves in an even tougher spot if maintenance issues are left unaddressed and lead to bigger expenses down the road.

There are ways that HOA administrators can reduce waste and save money without neglecting necessary maintenance and services, however—it's just a matter of working smarter and consulting the right professionals.

Plan Ahead

Boards often react too quickly and don’t make the right decisions. They have to budget and conduct a reserve study or have a strategic plan in mind to account for future expenditures, the pros say. What are some of the ramifications of inadequate reserve planning, and thus inadequate reserve funding? Aside from not being able to complete necessary repair or replacement projects on time—angering many of the unit owners—there are other ramifications. These can include safety issues, lower resale values, mortgage denial to potential buyers, inability of the association to obtain financing, and more.

If there is a serious physical problem that needs to be fixed immediately and the association doesn’t have adequate reserves, it may be forced to borrow funds at higher interest rates than those offered by traditional banks. And if repairs aren’t done in a timely manner, says Mitch Drimmer, vice president of business development at Snap Collections by Association Financial Services, a nationwide collection agency that specializes in community associations, the association may be liable for fines or violations from the town, city or community in which it is located.

“When it comes to saving money, you have to fish where the big fish are,” says Drimmer. What Drimmer means by that is that the first thing you need to do when you trim the budget is to figure out where the big budget-busters are within that budget. “Make a pie chart and see what the big piece is,” he says. “Usually insurance is the biggest piece.”

While Drimmer does not recommend getting rid of a building’s insurance, he says there definitely are ways to reduce the costs without shooting oneself in the foot, as it were. For example, every year that the policy comes up for renewal, try to get it reduced, he says. You can either simply ask that your current premiums be reduced, or you can get bids by other competitors to see if any other businesses have a lower rate.

You can also check for leaks in the common area pools and spas. “It’s good for planet Earth, and it’s good for the condo building,” Drimmer says. Yet another option to lower the water bill would be to submeter and to make residents pay directly for their own water. “Once people get a bill for something, they’ll strive to get it lower,” he says.

Look Closer

According to experts every contract—big or small—should be reviewed yearly to make sure that you’re getting what you’re supposed to be getting, and you’re paying what you’re supposed to be paying. All of a sudden, you might notice a rash of extra charges.

Another thing that experts recommend is that associations avoid and track auto-renew contracts for every company. For example, many contracts will state that the contract will automatically renew at the end of three years unless you notify the vendor 31 days in advance.

There are other ways condo associations can save money by making sure they’re getting the best prices for goods and services. The professionals go to trade shows and talk to vendors first-hand about their products and services. Make sure you do your due diligence and that all service providers are properly insured, licensed, and bonded.

Fees, Please!

If a condo building needs to collect money, it needs to make sure that it hires companies, including collection services that do not overcharge. In other words, “Are you spending $5 to collect $1?” Drimmer asks. He suggests that buildings get a traditional lawyer or engage a collection agency that is performance-based—one that would not cost the association any money unless they are able to recover money for the association.

Another big expense for buildings is a building’s real estate attorney—and many associations forget to get a competitive bid for this service, just like any other service they contract for. “You quote out a painter and a plumber,” Drimmer says. “Why not quote out a legal firm? Those are the top expenses of an association.”

Don’t underestimate the role of an HOA accountant who can help communities save money and identify areas where they can cut costs.

Professionals also suggest that boards religiously look at their budget and actuals on a monthly basis. It’s really important, experts say, because if you find any irregularities, you can identify where you’ve gone wrong and start making a correction right away.

Other Things to Consider

One easy way to make sure the building isn’t losing money is to make sure that the laundry machines are making as much money as they should be. It’s a good idea to assign someone to supervise the person who empties the machines if they are coin-based. This person can be someone on the board or a manager—anyone. Fortunately, the likelihood of experiencing this kind of cash problem is fading, as more laundry rooms are converted to smart-card or credit card-based machines.

Bank loans aren’t the only way to raise money other than assessments and raising the maintenance fee if your development needs more funds, according to Will Simons, RS, of Association Reserves, which has completed more than 30,000 reserve studies for associations nationwide.

Simons points out that some of his clients, especially resort properties, lease out party rooms, clubhouses or conference rooms for weddings and other gatherings to generate income. “If your property can make money, it’s a nice way to do so,” he says. However, that solution is not available to all associations.

Some communities he’s worked with, Simons continues, have small-scale projects doing in-house labor once a year to save expenses—such as “community painting day” in which people will come out and paint their neighbors’ garage doors. However, he says, “That’s a good solution in a pinch, and a nice way to build good relations in the community, but asking people to volunteer should be plan B—we don’t recommend counting on that over budgeting properly for professional work.”

One money-maker that the pros don't advocate is to start imposing extra fines on the residents of your HOA, says Drimmer. He recalls a situation where a building tried to fine someone $6,500 for painting their condo a color that had been approved 10 years ago but hadn't been re-approved since. Needless to say, that didn't go over well. “You want to be received nicely, not aggressively,” he says. “Imposing fines like a cop—nobody walks away from a speed trap feeling good.”

There’s another significant place where buildings shouldn’t be cutting costs however: with their generator.

In Chicagoland, which is prone to snowstorms, many condo buildings have backup generators which kick in when the power goes out. These generators keep the fire-safety equipment, the elevators and the emergency exit lights working even if the power isn’t—but some condo associations have decided to stop performing annual maintenance on their generators in an effort to cut costs, says Bob Birdsong, owner of OK Generators, the largest industrial generator dealer in the country.

Birdsong noticed this trend right around 2008 when the economy started to go south. “It’s a liability,” he says. “The fire pump system may not function if the generator doesn’t work, so you could have a fire, elevators wouldn’t work and the emergency exit lighting wouldn’t kick in.”

Not to mention the legality of it all. Birdsong says that condos are legally required to have the backup generators and they’re also responsible for maintaining them. “When they break, they’re without generators for more than a year, and then they get cited and they have to fix them all at once which becomes very expensive,” he says.

In the end, saving money doesn't have to involve enormous sacrifices or death-defying feats of accounting skill—it can be as simple as taking a good hard look at your books, paying attention, and asking yourself and your board if you can work a little smarter to stay in the black.     

  Liam P Cusack is the Associate Editor of The Chicagoland Cooperator.

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