Just Say No... to Home Warranties

Home warranties, or technically Residential Service Contracts, can be a polarizing topic in the real estate industry. Personally, I think they are a waste of money and bad news for a rental property owner. Here's why:

1) They are pushed upon the real estate industry by insurance companies. Brokerages and agents carry professional liability insurance, called errors and commissions or E&O. Every E&O application I have seen asks if all contracts are written with a home warranty; agents and brokers will either be denied coverage or pay a lot more for insurance if they answer "no" to that question. Why do they care? If the AC dies the day after closing, a buyer might want to start getting litigious with all parties involved - the seller, both agents, the home inspector... The E&O insurance carrier would be backstopping any claims against an agent - they want that agent to be able to direct the buyer to the home warranty company.

2) The service call fee paid to a home warranty company, typically $75-$100, is often the same price as what an owner would pay to have the issue directly resolved, if it is a minor repair.

3) Most policies have LOTS of exclusions. The most common & frustrating ones are when an item is still technically working, or it has already outlived its useful life expectancy. I had a client submit a claim for a rusted out hot water heater tank that was on the verge of springing a major leak, which would cause hundreds or thousands of dollars of ancillary damage. The claim was denied as the hot water heater was still technically working.

4) Reimbursement rates are very low, meaning that the majority of the higher quality and more reputable vendors will not work with a home warranty company. The warranty company does not have their own staff - they contract out the work to 3rd parties just like you would. A typical reimbursement for an HVAC service call in Texas is $35 (which you paid the warranty company $75 for). For larger jobs, like a compressor replacement, the reimbursement rate is often less than the wholesale cost of new parts - you end up getting used or second-hand parts.

5) Customer service and responsiveness leaves a lot to be desired. Get ready for lots of 30-45 minute hold times when you have to speak to someone live. And when your AC stops cooling in July, expect to wait 5-7 before someone actually shows up at your house.

6) The math just doesn't work. You are basically buying catastrophic coverage insurance for big ticket items. Let's look at the cost and expected lifespan of some major home components:

HVAC = $5000, 20 years = $250/year

Hot Water Heater =$900, 12 years = $75/year

Range: $600, 15 years, = $40/year

Dishwasher: $400, 15 years, $27/year

So if you save $392 per year, you can pay for all of the big ticket items that a home warranty would typically cover. Most policies cost ~$500/year.

So our recommendation is to take the $500/year you would spend on the home warranty and stick it in the bank in your rainy day rental property fund (which should always have a minimum of $5K or 3 months of rent in it).