Written by Lucas Hall at landlordology.com
If you’ve ever bought a house, you were probably given the opportunity to buy a home warranty in conjunction with the purchase.
Home warranties are some of the most-marketed products in real estate, and often come with referral bonuses. But are they worth it?
In my experience as a homeowner and landlord, I’ve had contracts with four of this country’s leading providers. I’ve learned that it’s a game of risk vs. reward and value vs. cost.
It’s a game of risk vs. reward and value vs. cost
This article discusses the common questions and concerns regarding home warranties, including:
- What is a home warranty?
- What is covered?
- How much do they cost?
- Are they worth it?
What Is a Home Warranty?
Simply put, it’s a home services contract that will pay for necessary repairs due to common maintenance issues, and for the subsequent replacement of appliances if they cannot be repaired.
The home warranty industry was started in 1971 by American Home Shield and has grown into a competitive nationwide industry occupied by dozens of companies. However, it’s important to realize that though these policies are called “warranties” they are not actually warranties in the common sense of the term.
It’s Not Actually a “Warranty”
A traditional “warranty” in the general sense, is a guarantee towards the quality of a product or service made by the seller to the buyer.
A “home warranty” is not a guarantee, but rather a contract to provide repair and/or replacement services for major appliances and home systems that fail due to normal wear and tear.
These service contracts will not cover every repair or issue that you may have.
In fact, common consumer complaints show that many of these companies try to evade coverage by citing homeowner’s maintenance negligence or claiming the issue is a “pre-existing problem.”
What Does the Policy Cover?
Typical basic policies cover home appliances, heating, cooling, plumbing, and electrical systems.
For a premium, most providers will cover roofs, wells, pools, plumbing and lighting fixtures, and lawn sprinkler systems.
Structural systems are not typically covered under a home warranty policy, but rather by a traditional primary home insurance policy.
|Repair Item||Basic Plans||Premium Plans|
|Built-in Microwave Oven||X||X|
|Garage Door Opener||X||X|
|Stand Alone Freezer||X|
|Lawn Sprinkler System||X|
Always Read the Fine Print
Actual coverage varies significantly between the plethora of home warranty companies. Most companies will promise you the world, but many consumers often find that their contracts are riddled with exclusions and denial provisions.
For example, most basic policies include plumbing, but not if the pipes freeze.
Further, the actual parts that tend to break most often, like a shower diverter or sink faucet, are not covered at all. When the contract refers to “plumbing,” they only mean the actual pipes in the wall.
It’s important to remember that home warranty companies are for-profit entities and they will pursue their best interests, not yours.
Home warranty companies are for-profit entities
and they will pursue their best interests, not yours.
Check the Maximum Allowances
Though “heating” is typically covered with the option to replace the furnace should it not be repairable, the contract might specify that the insurer will only pay up to $1,000 toward a replacement, at their option.
Though helpful, most furnaces cost between $3,000-$7,000, leaving the consumer to pay the difference.
Further, the homeowner does not get to choose whether it’s time to replace the unit or not. The warranty company could opt to issue a payout, and let the homeowner deal with it alone.
By that point, the furnace has been broken for at least a week, the tenants are asking for a rent refund, and the policy holder must coordinate the repair with another service company.
How Much Do They Cost?
Besides Cozy, it’s hard to find products that provide incredible value at little or no cost. Like most warranty and insurance products, the cost of a policy depends on the amount of coverage you buy.
Again, most companies have both basic and premium policies that you can purchase, but they will all insure specific items, such as hot tubs or solar panels, for an extra fee.
In my experience, policies range from $400-$800 per year for a typical single-family home, depending on the amount of coverage that is purchased.
Most companies will validate their price by providing cost-comparison charts of common repairs, such as the one below, but fail to mention the maximum payouts or exclusions previously mentioned.
|Item||Average Replacement Cost||Average Repair Cost||Cost w/ Home Warranty|
|Central A/C||$4,013||$535||$100 service fee|
|Heating System||$3,000||$685||$100 service fee|
|Refrigerator||$1,025||$308||$100 service fee|
|Plumbing||$1,100||$363||$100 service fee|
|Range/Oven||$1,400||$180||$100 service fee|
|Washer or Dryer||$525||$180||$100 service fee|
|Source: Estimates are based on national independent service contractors|
Though such comparisons are mostly accurate, the dirty little secret of the insurance industry is that these companies make their money because they know most people don’t fully utilize the service.
…they know most people don’t fully utilize
Deductible/Service Call Fee
The most common deductible for home warranty policies come in the form of a service fee.
When a repair technician shows up to inspect and service the property, the policy holder is responsible for providing a small payment directly to the technician, regardless of the work being performed.
In my experience, this deductible typically ranges from $75-$150 per claim. HMS National has the only policy that I’ve seen with a $0 deductible, however their premiums are slightly higher. Perhaps it balances out in the wash (pun intended).
Most companies contractually have a 30-90 day waiting period between signing up and when the consumer can actually use the service.
This waiting period is designed to prevent a policy holder from making a claim on a pre-existing condition, but I think it is a horrible way to start out a new business relationship.
It’s like saying “Yes, you must pay the bill, and no, you can’t use the service yet.” Can you imagine if car dealerships made you pay for a car, but then you couldn’t drive it for 90 days?
Yes, you must pay the bill, and no, you
can’t use the service yet!
These waiting periods can be quite frustrating when a new repair issue surfaces prior to the waiting period ending – leaving the policy holder to seek help elsewhere. What a bad first impression!
Is a Warranty Worth Buying?
Whether or not you choose to buy a home warranty is a personal decision based on multiple factors.
Personally, I typically purchase a home warranty for the first 1-2 years on every property that I acquire.
After a few years, I usually feel that I have a better understanding of the status and condition of the home and its appliances, and usually choose to self-insure repairs via an emergency fund from that point on.