Can the HOA earn profits from the money it collects? It’s a question many homeowners and even board members ask. While everyone knows the association collects dues and other payments, there is less clarity about what happens when more money comes in than goes out.
Can the HOA Earn Profits?
At its core, a homeowners association is not a for-profit corporation. In Virginia, as in many other states, most associations are structured as nonprofit corporations. This means they exist to manage and maintain common areas and enforce community rules, not to line anyone’s pockets.
That said, does this mean that associations can’t ever spend more than they have? Not exactly. Associations often collect more than they pay out in a given year, creating surplus funds that boards must manage responsibly.
From Dues and Special Assessments
If the board sets dues at a certain level and expenses run lower than expected, there may be money left over at the end of the fiscal year. This does not mean the association is a profit-making entity in the traditional sense. It simply means that revenue exceeded expenses.
Surpluses are common, especially when final costs turn out to be lower than anticipated. Should the association budget for profit from dues and assessments? No, the purpose of dues is to cover operations and reserves —not to make money —but surpluses are not unusual.
From Fines for Violations
This is more complicated. Fines are designed as a deterrent, not as a financial strategy. The board should not view fines as a way to pad the budget or as a steady revenue source.
In Virginia, associations have the authority to levy fines under the Virginia Property Owners’ Association Act and the Virginia Condominium Act after meeting certain conditions. That said, fines must be reasonable and related to the violation.
If an association collects fines, it can use the money to support operations, but boards should never rely on them. Fines are not intended to be a source of income; instead, they encourage compliance with the rules and serve to penalize offenders.
From Other Sources
Some associations earn revenue from other sources, such as facility rentals and vending machines. Associations may generate more income from these sources than they incur in costs. That said, associations must not solely rely on them.
For some associations, the governing documents may restrict or guide the board’s use of non-dues income. Boards should remember that any surplus from these activities belongs to the association as a whole, and not individual members.
Where Should the Association’s Profits Go?
Surpluses occur when income exceeds expenses. This can happen for many reasons, including efficient management, unexpected savings, or higher-than-expected revenue from other sources.
State laws and governing documents typically control how associations must use these funds, but boards generally have a few options to consider.
1. Back to Homeowners
One option is to refund money directly to homeowners. This can happen when a special assessment overshot its target or when laws require boards to return any excess money. Homeowners often welcome refunds, but they can create accounting challenges, especially in larger communities.
2. Carry Over
Another option is to carry over the surplus to the following year. This can offset future dues or lower them, giving homeowners some relief. Carrying funds over is often the simplest approach because it keeps money within the budget cycle and reduces the need for refunds.
3. Reserve Fund
Associations can also deposit extra money into reserves. This is one of the most common and responsible ways to use surpluses, since reserves are critical for long-term repairs and replacements. Adding to reserves can strengthen the community’s financial health and reduce the likelihood of future special assessments.
4. HOA Projects
Boards may use surplus money to fund projects. Maintenance, repairs, or upgrades that benefit all residents are good candidates. For example, repainting common areas, adding new landscaping, or improving amenities like a pool or playground can all be funded with extra income.
5. Investments
Can associations invest surplus funds? Yes, but with limits. The safest investments prioritize liquidity and security over high returns. Common investments include short-term bonds, money market accounts, or insured certificates of deposit.
Not all associations have the authority to invest freely. Some are restricted by state law or their governing documents. Boards must review those rules before investing to avoid liability.
Can an HOA Make a Profit for Personal Gain?
While surpluses can and do exist, associations and boards should never use them for personal gain. Board members are volunteers, and they don’t receive compensation. If board members use surplus funds for their own benefit or give them to select homeowners, that may constitute a breach of fiduciary duty.
Associations must use funds for the collective good, not private benefit. Misuse of surpluses not only violates trust but can also expose the board and the association to lawsuits or even criminal charges.
The Importance of Proper Accounting
Proper accounting is crucial for handling revenue, expenses, and surpluses. Boards must keep accurate records to track where money comes from and where it goes.
Transparent accounting can help build trust with homeowners, while the opposite can raise suspicion. State laws and governing documents also require accurate records.
That said, accounting is not easy. In fact, many associations, especially self-managed ones, struggle most with accounting and financial management. Hiring an accountant or a professional management company can help address this problem.
Can HOAs Earn Profit? Answered!
Associations do earn profit in a way, but not in the traditional sense that businesses do. Boards can encounter excess funds, and it is essential to manage them responsibly. That said, when it comes down to it, a surplus is always better than a deficit.
National Realty Partners is a leading provider of association management services in Virginia. We can help your board manage surplus funds. Call us today at 703-435-3800 or request a proposal online to get started!
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