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Home Warranties for Landlords: What You Need to Know

Using a home warranty on your rental property can create unnecessary problems.

People hear the phrase “home warranty” and assume that they should probably have one for their home. After all, a warranty itself is defined as “a written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary within a specified period of time.” Sounds great, right? You want to protect your biggest investment.

Home warranties can be great if you’re the person residing in the home. However, using a home warranty on your rental property can actually create more problems for you and cost you more money.

What is a Home Warranty?

Many people aren’t quite sure of the difference between a home warranty and home insurance. Think of a home warranty as a service. You use this service to repair or replace certain items in your home. Home insurance covers damage from an accident or disaster, such as a flood, fire, etc. While home insurance is strongly encouraged, a home warranty is not.

Most people have never heard of a home warranty. They are typically marketed to persons involved in a real estate transaction. Often the seller of the home will include a home warranty in the purchase, similar how a car dealer includes a warranty with a car purchase. Typically the warranty period is for one year.

Home warranties are designed to cover things that your insurance won’t. If your air conditioner breaks down, your home warranty may cover a replacement unit. Home insurance, on the other hand, would only cover extensive damage to the home that came as a result of the machine failure.

This is why home warranties entice many owners. Who wouldn’t want more coverage on their home, their biggest investment? While home warranties seem like a good idea on the surface, they can actually end up costing you money.

What Exactly Does a Home Warranty Cover?

Home warranties typically cover fixtures in the home such as lights and ceiling fans. They also typically cover major appliances and home systems such as heating and air conditioning units, plumbing, and electrical. They can also cover appliances like dishwashers, refrigerators, and microwaves. Make sure you read your policy or the policy you’re considering purchasing to be clear on what the warranty will cover.

How Does a Home Warranty Work?

Let’s say your dishwasher breaks. The first thing you do is file a claim under the warranty. This requires a $65-100 service request in order to start the claim process. The home warranty then assigns the claim to a local vendor. In this instance, a local appliance repairman will assigned to diagnose, and in some instances, repair the dishwasher.

If the dishwasher cannot be repaired or the repair exceeds the value of the unit, the vendor will notify the home warranty. Depending on the warranty provider, they may offer a cash settlement, or they will purchase a new unit, again using one of their vendors. This process usually takes 7-10 days and often will not include installing the new appliance or hauling the old one away.

Why Home Warranties Are a Problem for Your Investment Property

Home warranties aren’t always a bad thing. If you are the person living in the home, they can be beneficial. The warranty is designed to fix issues in your home in a somewhat timely manner and save you money. If you recently purchased the home, a warranty offers peace of mind, especially if the warranty was paid for by the seller.

However, in an investment property, you have to cater to your tenants. Going a week or more without a functioning toilet or microwave isn’t an option for them. The longer they have to wait, the more likely they are to request a rent credit, costing you more money.

Another issue is that home warranty companies typically work with subpar vendors. Their online reputation reflects this. If you Google or Yelp the vendors they use, you’ll usually find that they have between 1-2 stars. So now not only has your tenant waited too long to get their problem fixed, but the work likely was not done as well as it should have been. If the owner would have just sent a good vendor from the start, it would have been resolved much more quickly, resulting in a happy tenant and money saved for owner.

We hope we were able to give you some insight on why home warranties are problematic for you rental property.

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Steve Welty

Steve Welty is the founder and CEO of Good Life Property Management. Since its establishment in 2013, Steve and his team have made owning rental property easy for over 1,000 San Diego homeowners.Their purpose is Life Improved–creating opportunity, enjoyment, and impact for their community is what matters most. DRE #01744610

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Hey guys, Dave here with another episode of The World of Good Life. Today I want to talk to you guys about home warranties and why they don’t make sense. So let’s take a look at a couple of really common repair issues that you may experience at your property. Replacing a dishwasher and replacing a garbage disposal. So let’s start off with the out of pocket expenses. Without a warranty, a dishwasher is about three-hundred bucks. Now remember for the home warranty, typical home warranties, the 650, 750 bucks, so we’ll just go ahead and call it 700 and start from there. So most of them obviously are going to have that service call fee, so we need to make sure we add that in. Generally, that’s in order between 65 and 100 bucks, so we’ll call it 75 for this demonstration. So the dishwasher goes out of the property and needs to be replaced. So under option A, when we use one of our own preferred vendors or we buy from Home Depot, a dishwasher is about 300 bucks. We can get delivered and installed about three days. If we go through the home warranty, we got to contact the home warranty who sends out a local vendor who’s got a diagnosis that it’s actually irreplaceable. Then the home warranty’s procurement department has to purchase that new appliance delivered to a local site. Someone’s got to pick it up, bring to the house. The whole process may take one to two weeks. So the advantage, saving money on the home warranty, but to quick your service on the out of network cost. Next up, garbage disposal. Typical garbage disposal replacement cost is about 300 bucks. Again, if we’re using the home warranty, you add in that service fee, so that’s going to take it up 75 bucks. If we just do those two repairs alone over a 12 month period, you can spend about 600 bucks out of pocket, whereas at the home warranty, if you add in the cost of the home warranty, you’re actually looking at about 850 bucks. Now, let’s say you just have really bad luck in addition to those two repairs, the furnace goes out. So it’s freezing. Well, it doesn’t get that way here in San Diego, but other parts of the country may. The furnace replacement cost is about 2,200 bucks going right and around here. We usually have that done about two to three days. Now, if you go through home warranty, kind of the same issue, they’re going to send out a local vendor. These vendors are usually subpar vendors. They’re usually not the highest rate. If you find them on Yelp, Angie’s list, Google, they’re usually going to be those one, two, maybe three star rating if you’re lucky. They got to go out there and diagnose it, send the report back to the home warranty. Then the home warranty has got to approve it for a replacement. Most home warranties have a limit on such the thing, such as a thousand bucks, so we’ll go ahead and call it a thousand. Also, this is going to be out of pocket unrelated expenses, such as bringing it up to current code. A lot of installers want to install stuff like the flexible gas line, make sure it’s got a sediment trap. Maybe they have to increase the size of the register. There may be hers testing involved. All of the stuff is usually not covered by the home warranty, so your out of pocket cost is going to be about $1,500. Also, don’t forget to add in that service fee. Add up all those charges of the course of a year. Out of pocket, no warranty looking about $2,800. With the warranty, you’re actually at $3,275. Now, remember, we’re talking about a rental property here. That out of network experience is only going to take about a week total to do all three of those repairs. Going through the home warranty, we could be looking it up to three weeks. Now, if you have tenants in place, that’s going to be some pretty angry tenants. This is a couple of things to keep in mind. Here at GoodLiveArtPolices, we’ll let you keep that home warranty for the first year. A lot of you guys are buying homes. You don’t have a lot of history with it. The sale is paying for the home warranty, so then it kind of makes sense. After that year, when you’re paying that $700, that home warranty, as you can see here, it’s going to make less and less financial sense. Also, the quality and customer service level is going to take a dip, so that’s why we don’t recommend it. Thank you.