Home Warranties: Think you’re covered? Think again.
Home warranties have become a real estate staple. They have even made their way into the official Arizona Association of Realtor’s Purchase Contract–the standard contract used for all residential transactions in Arizona! On the surface, a home warranty may seem like a good idea: Pay $650 for a year’s worth of coverage, and you only have a $75 co-pay each time service is requested. One may think this warranty is protecting them from a large unknown future expense. So you buy it. You think you’re covered. But think again.
Let’s break it down:
1. You’re covered… well… sort of. The allure of only paying a $75 copay for an expensive home repair is often an influencing factor for a home warranty purchase. If the water heater needs to be replaced, you only have to pay the $75 co-pay, right? Sounds like a deal! Think again. Home warranties are notorious for not covering “modifications” or “upgrades”. While the actual cost of the new heater is covered, the home warranty probably won’t cover the removal and disposal of the old heater, the new lines, the valves, or the fittings. The total out of pocket cost for those items could be another $325. This same situation applies to appliances, plumbing fixtures, garage door systems, and most importantly… HVAC systems. Additional reasons home warranties may not cover items include “improper installation,” “improper maintenance,” or “excessive wear and tear”– all of which can be very controversial. Lastly, most home warranties contain “maximum payout” limits. Often, if a repair exceeds a certain dollar figure, the home warranty has a maximum payout limit specified in the contract. This figure is usually much less than the cost of the repair. Check your contract for modification exclusions, upgrade exclusions, reasons for a claim denial, and maximum payout limits–especially on HVAC equipment.
2. The quality… or lack thereof. Home warranties partner with various vendors and use their volume to negotiate discounted pricing. So when the home warranty dispatches a vendor to your property, that vendor is most likely looking to get in-and-out as quickly as possible. Since the pricing has been squeezed so tight, they’re normally looking to cut costs in every way possible. In all our years of dealing with home warranty vendors, we’ve noticed the significant disparity between the quality of work from home warranty vendors, and the preferred vendors that Ultimate Properties works with. Also, remember what we said about items “not being covered”? What’s to stop the vendor from finding additional repairs that are “not covered” in order to acquire more work billable at a normal rate instead of the warranty’s discounted rate. Talk about the rooster in the hen-house! Certainly, we’re not saying this happens with all home warranties or all of their vendors. But it does happen, more often then one might think.
3. Not Landlord-Friendly: Part of being a good landlord is responding to service requests in a reasonable time and manner. Home warranty contracts often include language like “24 business hours” or “3 business days”. When it’s Friday and 110 degrees outside, and there’s no working air conditioning system, “24 business hours” doesn’t cut it. The same goes for failed water heaters in January, or a garage door that is stuck closed with a tenant’s vehicle trapped inside. Whatever the request may be, the amount of time it takes to schedule and complete service can often be excessive–leading to frustration for all those involved. Additionally, the payment method for many home warranties and their vendors is not landlord friendly–requiring payment upfront or payment at the time of service–which is not ideal when we don’t know or trust the companies doing the work.
In Closing… One of the primary reasons people buy home warranties is that they think they are saving money. The assumption is that by spending $600/ year on an annual policy, they will receive that or more in serviced rendered. But think about it, if home warranties were rendering more services than what you pay for, they would be out of business! Like a casino, the house always wins. So, think you’re covered? Think again. Contact your home warranty today and find out what loop-holes may exist in your coverage. With the elimination of R-22 refrigerant in HVAC systems, what will your home warranty cover? Are their modification and upgrade exclusions in your contract? Perhaps you’ve been paying for a home warranty for years and are hardly utilizing it? Whatever the case may be, we encourage all of our clients to think hard about whether a home warranty is the right decision for their investment property.