Are home warranty plans worth it?

Are home warranty plans worth it? Do you need a home warranty? As a longtime home owner and landlord, I have experience with home warranties. Here’s when I’ve found they’re worth it, and how I decide when to go without.

Offering a home warranty certainly makes your home more marketable when you’re selling. But when it comes to buying one myself, I don’t bother anymore. Here’s why.

Why home warranties make a house more marketable

Offering a home warranty when you sell your home offers peace of mind. A newcomer to the area may not know who to call if something goes wrong. And offering a warranty suggests you have confidence nothing will go wrong. It’s a marketing ploy, but an effective one. A warranty will probably cost you around $500, but if it helps you sell the house a month faster and avoid another payment, it pays for itself.

Paradoxically, spending $500 on a home warranty could pay for itself more directly by helping you get a higher price. When you get an offer asking you to come down on price, you can have your realtor remind the other realtor that you’re offering a home warranty when making your counter-offer.

If I were selling a house, I would think a home warranty plan is worth it.

Do you need a home warranty plan? Is it worth it for yourself?

When I’m selling a house, I think a home warranty is worth it. Not so much if I’m going to be buying one for myself to actually use. That’s counter-intuitive, I know. But hear me out. My experience with them hasn’t been good.

If you do get a home warranty, ask lots of questions. Get all the answers in writing. Save everything. And I do mean everything. If it seems like a lot of trouble, that’s because it is. It’s up to you to decide whether it’s more trouble than it’s worth.

The math behind home warranties

The reason companies offer home warranties is because they turn a profit on them more often than not. Think about that for a second. They sell you a warranty for $500 because they’re pretty sure they’ll spend less than $500 honoring it.

They’ll tell you that they’re able to negotiate a better price than you could get yourself. And while that factors into the equation, that’s not the entirety of it.

There’s always math behind warranties or insurance of any kind. They can easily figure out how much they’re going to pay out per year. The data to do that exists. What they don’t know is who’s going to file what claims. But all they have to do is figure out how much they’ll pay out per customer, and charge more than that to make a profit. To increase profits, they just try to avoid paying out as much as the math said they would that year.

The average home needs $1,000 in maintenance per year

Always, always keep the $1,000 figure in mind. On average, you will spend $1,000 a year in home maintenance. That means any sort of necessary repair. Some years it will be cheap maintenance like replacing a dead electrical outlet or light fixture. Some years it will be a $5,000 project like replacing a roof or an air conditioner. But on average, it tends to work out to about $1,000 a year. I’ve found this to be true of my own home and the properties I manage. I can think of one property I put exactly zero dollars in the last couple of years, but that makes up for the $3,500 I spent on it the year before that. You know that saying when it rains, it pours?

So here’s what I do. I set aside a thousand bucks a year for maintenance. If I spend less than that on a given year, I roll it over to next year. Those years when I only spend a couple hundred bucks help make up for those years I have to do something expensive like replace a hot water heater, or worse yet, a roof or furnace or air conditioner.

Why home warranties are profitable

Home warranties are profitable because they charge more than they pay out. Sometimes they do end up paying out more than the $500 you pay in, but more often than not, they come out ahead. There are several ways they do this.

Home warranty deductibles or copayments

The first thing to ask about when discussing home warranties is whether you’re responsible for any kind of deductible or copayment. When I bought my first home warranty in 2002, that warranty didn’t have any out-of-pocket expenses attached. I called a phone number when I had a problem, they sent out a master craftsman to fix whatever problem I had, and I didn’t owe a thing.

The one I had more recently wasn’t like that. Any time I made a claim, I was responsible for a $100 copayment. So while it looked like you’d be able to get by with spending $500 a year on maintenance instead of $1,000, in practice it didn’t work that way at all. If you used the warranty five times on five minor repairs, you’d spend the $1,000 average. At that point it’s a payment plan, not a warranty.

In those instances, if you use the warranty six times, not only do you not need a home warranty, the home warranty ends up being a liability.

The deductibles prevent people from filing claims on stupid things like a burned-out light bulb. But they also discourage you from filing legitimate claims.

Home warranty quality of repairs

The other thing to keep in mind is the quality of repairs. Even that first home warranty plan I had that sent out a master craftsman didn’t do the finest repairs. For example, the first claim I made was for a leaky hot water heater. They sent out a friendly master plumber. The plumber looked over the hot water heater and told me it was 19 years old. That’s over its life expectancy. Of course, my realtor told me that because I had a home warranty, if I needed a hot water heater while it was in effect, they’d give me a new hot water heater.

The plumber was a nice guy, so he called in and asked if he could replace the hot water heater. But the company said no. They told him to replace the parts. So he fixed the leak, but within two years, the hot water heater developed other problems and I ended up needing to replace it. All I really did was delay the inevitable.

That’s one reason I don’t think home warranty plans are worth it. But that wasn’t my worst experience, by a long shot. Let me tell you about my $700 leaky faucet.

The time my home warranty provider threatened to sue me

But some home warranty companies are worse than that. Let me tell you about the time my home warranty company threatened to sue me for a repair they didn’t do.

The last time I bought a home warranty, it was for a house that had sat empty for a couple of years. My realtor recommended I get a warranty since literally anything could be wrong. Sure enough, soon after we had the water turned on, we discovered a leaky faucet outside. I filed a claim, and they sent out someone to repair it. The “repair” turned out to be turning the shutoff on just enough that water would run, but not enough that I could see it dripping. I paid $100 for this shoddy non-repair. Once I detected they hadn’t actually done anything, I filed a second claim. I put a zip tie on the shutoff so I could tell if they’d touched it, and took photographs of everything. The second time, they sent the same company out and they didn’t do anything at all except leave a note saying they fixed the problem and I didn’t owe anything this time.

About a month later I got a nasty note in the mail threatening to sue me if I didn’t pay the $100 they had said I didn’t owe.

Of course, if I’d kept the note, we’d have been looking at a short day in court. The company was counting on me having not kept the note, or being unwilling to take a day off work to defend myself.

Instead, I called my realtor and told him the company he’d recommended was threatening to sue me for having used their services. He made a phone call and took care of it.

The company they dispatched to repair my leaky faucet is no longer in business. That tells me I’m not the only one who had problems with them.

How I finally fixed the problem

In the end, that home warranty ended up being a lot of wasted money. I spent $500 on the home warranty. I spent $100 on my first claim. And then I ended up paying someone else out of pocket to actually fix the problem. So in the end, that leaky faucet ended up costing me more than $700.

It would have been a lot cheaper to just pay for the repair out of pocket. I would have saved 600 bucks. That’s why I don’t think that home warranty plan was worth it. Not by a long shot.

What to do instead of buying a home warranty

So while I’m saying you don’t need a home warranty, you do need something. What you need instead is a plan.

The big-ticket repairs in a home all have a predictable life expectancy. A roof lasts anywhere from 15-25 years, depending on the type. Air conditioners last 12-15 years. Furnaces last 15-30 years. Hot water heaters last 8-12 years. If it seems like everything goes wrong in a house around the same time, you’re not imagining things. They do tend to cluster together.

Regular preventative maintenance can help stretch out life expectancies a bit, at least in the case of furnaces and air conditioners. The more religious you are about changing filters, the longer those two items will last. A lot of HVAC companies offer preventative maintenance for around $75. You don’t necessarily need to do that every year, but it’s worth doing from time to time.

But the main thing to do is save up for those big-ticket items, and then stagger them as best you can to try to avoid replacing all of them every 12th year. Set aside $1,000 a year, and then you should have enough for most of the big ticket items as they come due. Frequently a minor repair can help you get a couple more years out of an item if you need it. If you end up with a shortfall, many of the companies who do big-ticket work offer financing. Just make sure you pay it off before the interest rates increase.

The other thing you want to do is make sure you’re using reputable contractors. Angie’s List is a good resource for that. But it’s far from the only one. Check out what Yelp has to say. Hyper-local social networks like Nextdoor are also helpful for this. You’ll find your neighbors are usually more than happy to share their experiences with various contractors and make recommendations, either for or against.