If you have bought or sold a home in the last few years using the services of a real estate agent, either the buyer’s or seller’s agent probably included a home warranty in the transaction. Some agents will pay for these policies themselves as a way to sweeten the deal or reassure the buyer that even if something unexpectedly goes wrong with a major system, like plumbing or electrical, the warranty coverage will keep the new homeowner from getting stuck with a big repair bill.
But are home warranties really worth the cost? Typical premiums for home warranties run between $400 and $600 per year, according to a recent story in the LA Times. But what do you really get for that money? Would you be better off depositing that same amount of cash into an interest-bearing account and using it to pay for repairs when they become necessary?
Organizations like Consumer Reports think so, apparently. In a recent report, they discussed a complaint filed by consumer protection officials in New Jersey against a prominent home warranty firm that, according to the complaint, systematically denied claims on the basis of pre-existing conditions, inability of homeowners to document that the faulty system or appliance had ever worked properly, or lack of proof of proper maintenance. Sometimes, the company denied claims even when technicians verified that proper maintenance had been carried out.
A home warranty works much like an insurance policy. You choose a level of coverage and pay an annual premium. If a system or appliance covered by the warranty breaks, you file a claim, either by phone or online. The warranty company then sends out a technician from their list of approved providers to perform the repair, and the homeowner usually pays a $50–100 service fee. Some policies require the homeowner to pay for the repair up front, then submit invoices and receipts for reimbursement.
The principle behind insurance, of course, is uncertainty. The insurer (in this case, the home warranty company) is betting that enough homeowners won’t file a claim—or will fail to file a valid claim—to cover the cost of the few who do. The homeowner is paying a manageable amount of money to avoid the possibility of having to pay an unmanageable amount of money for a major repair.
For some situations—healthcare expenses, for example, which can quickly run into hundreds of thousands of dollars—paying a smaller amount to insure against the possibility of a major loss makes a great deal of sense. But many consumer advocates and others question the need for insuring against a faulty home system or appliance. Most such expenses, while not pleasant, can be handled with current income or savings, and most homeowner’s insurance policies cover the truly catastrophic events, such as storm damage or fire. And homeowners who purchase an older home—perhaps with appliances nearing the end of their useful life—are not typically going to be able to upgrade aging systems and appliances with the proceeds of a home warranty, most of which have limits and provisions in place specifically to exclude coverage of the types of pre-existing problems that the new homeowner is trying to avoid paying to fix.
The main takeaway from all this is that in most cases, home buyers would be better served by putting that $400–600 per year into a money market account earmarked for home repairs. If the real estate agent offers to foot the bill for a year of coverage by a home warranty—sure, why not? But paying for such a warranty with your own money is more likely to lead to frustration than actual money or time saved on home repairs.
Stay Diversified, Stay Your Course!