How To Read HOA Financial Statements And Understand Them CM

how to read hoa financial statements

If you want a quick rundown of your HOA’s financial condition, the Balance Sheet is your answer. It should not have too many receivables, especially overdue receivables, as that would mean the board is not putting a lot of time into collection efforts. Owners should look for overly inflated expenses or redundancies to spot fraudulent activity.

how to read hoa financial statements

Association Management and Vendor Relationships

A key metric of the HOA Balance Sheet is the current ratio, which measures the association’s ability to cover its short-term liabilities with its short-term assets. Analyze the statement to ensure that the HOA is financially sound and able to meet its obligations, which guarantees the well-being of the homeowners. Because of privacy concerns, some information should go only to board members. While some HOAs may frown on the cost of an audit, it may be well worth it. An audit will help uncover irregularities that would otherwise go unnoticed.

STEP 4: Make Informed Decisions for the Benefit of Your HOA

The frequency of preparing an HOA statement can be different with different HOAs and also by varying state laws. A good idea though is to prepare it on a monthly basis though, so it becomes a part of members’ monthly expense habits. In addition to statements for regular dues, owners may also receive an HOA statement with a special assessment (an unplanned payment that an HOA board can impose on homeowners) on it, as and when required. Making this realization early and opting for an HOA financial management service like Community Financials can prevent significant loss of funds due to tardiness of collecting, human error and legal fees. There’s no shame in asking for help, especially when it comes to a subject as difficult and confusing as accounting.

how to read hoa financial statements

HOA Demand Fees

Homeowners’ associations must carry this coverage according to federal guidelines for homes in the community to be purchased using FHA- or Fannie Mae-backed mortgages. Hopefully a business earns a profit called net income (revenues are larger than expenses). All Balance Sheets contain the same categories of assets, liabilities, and owner’s equity. Owner’s equity (or net worth or capital) is increased by money or property contributed and any profits earned, and decreased by owner withdrawals and losses. Understanding how to read a balance sheet allows you to compare the expenditures that your HOA incurred against the income that it collected.

General Ledger

It shows the money flowing in and out of the HOA from three financial activities—operations, investments, and financing. Title professionals looking to gain insights from the Comparative Expense Report should start by comparing actual expenses against budgeted figures to identify variances. Focus on significant discrepancies that could indicate financial mismanagement or unexpected costs. The Comparative Income and Expense Report is crucial for evaluating the financial performance against budgeted expectations, highlighting areas of fiscal health or concern within the community. The D/E ratio indicates the proportion between debt and equity, reflecting how much of the association’s operations it finances with debt versus its own resources. As a title professional, when reading the HOA Income Statement, focus on understanding the sources of income and the expenses incurred by the HOA.

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While assets are where the money comes from, liabilities are where the funds are spent on. The current liabilities are expenses the association needs to pay off within a year. Meanwhile, the long-term liabilities are obligations that can be settled even after a year.

Homeowners Associations must be able to produce reports that can detail expenditures and revenues for multiple funds, and reports that summarize the financial activities of the entire entity across all funds. For example, under California law, the Association’s Reserve Account must be a separate fund from the operating account. The Reserve Account is bound by specific legal restrictions that hoa accounting do not apply to the operating fund. Let us assume that a homeowners association is supposed to receive $2,000 a month in assessments. Let us also assume that it has vendors, all of which do work monthly and all of which get paid monthly. Let’s also assume that in one month 25% of the homeowners paid assessments late – they paid the next month, and that all of the vendors were paid monthly.

How to Review Your HOA’s Income Statement

  • This understanding aids in making informed financial decisions and safeguarding sustainability.
  • As a title professional, focus on net cash from operating activities to assess if the HOA effectively manages its regular financial obligations.
  • Though it is not an HOA’s main goal to earn a profit, a net loss would indicate that the community had more expenses than revenue streams in the past period.
  • On the other hand, not all HOAs are expected to be able to come up with financial reports on their own.
  • It serves as an appraisal of the financial health of the HOA’s reserve funds.
  • Equity is another important aspect of the HOA balance sheet that needs to be analyzed.

Though most associations prepare financials monthly, there are situations in which another frequency may work better. “It typically depends on the association’s size,” says Corbin Seti, senior vice president of community and lifestyle services at FirstService Residential (formerly known as RMI Management) in Las Vegas. According to GAAP, a CPA will perform an audit in order to obtain reasonable assurance that the financials taken as a whole are free from material misstatement. The CPA will gather supporting evidence and provide an opinion on whether the financial statements conform to the accounting standards. HOA accounting can be very confusing — enough to make you use the wrong accounts when recording revenue and expenses.

Interpreting the HOA Income Statement

Knowing what the HOA standard financial statements are as well as how these documents represent the movement of money within a homeowners association, are vital for transparency and accuracy. The last thing they’d want is to be kept in the dark as to where the funds are being allocated. Throughout this article, we have explored the various components of HOA financial statements, including the balance sheet, income statement, cash flow statement, and notes. We have also discussed common financial ratios and provided tips for interpreting the statements effectively. In addition to these three primary financial statements, the HOA financial statements may also include footnotes.


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