Are Home Warranties Worth It?

Home warranties have been around for decades but have just started to be widely purchased in the past ten years. They are often used in sales transactions as a kind of “insurance policy” that the seller can provide for the buyer. The theory is that if something goes wrong with a covered item — appliance, electrical, plumbing, etc. — the buyer will call upon the insurance policy instead of blaming the seller. While this sounds great in theory, the general policies have some significant limitations and issues.

are-home-warranties-worth-itFor example, home warranty companies could have customer service issues that should cause a buyer some concern. However, to be fair, much of this comes from a common misunderstanding about what is actually covered. This happens because few people who receive the policies actually read them to find out what is not covered – like pre-existing conditions, or certain appliances in the basic policy. Of course, some complaints result from companies refusing to cover certain items and hope that people will give up trying, but it should be noted that some of these claims are just plain dubious.

Which leads to the big question: Are home warranties worth the $350 – $500 per year?

The answer is, it depends.

There are plenty of people who make claims, get paid out, and are happy with their service. But, there seems to be a lot of people who are not very satisfied.

Because the most common way for someone to be introduced to a home warranty policy is typically at the purchase of a property, let’s address that first.

Seller’s Side – If you’re selling your home, you might believe that offering a warranty is a good marketing tool to get the property sold. This is the typical pitch from an insurance company. And if something breaks after the sale, the new owner can make a claim on the policy. It’s estimated that about 80% or more of residential sales come with a home warranty policy. And if the seller feels more comfortable with this “insurance,” then it’s a small price to pay for that piece of mind.

Buyer’s side – If you’re buying a home and the seller is throwing a home warranty policy in, you have nothing to lose. Just don’t count 100% on making a successful claim on the policy.

For one thing, many buyers forget they even have the policy! So keep a note on your refrigerator to remind you. Additionally, after an unsuccessful claim, some people find it easier to just call a local repairman. That’s unfortunate, but insurance companies do not make money by easily paying out claims. And each year they learn, and their policies further restrict against the expensive issues they’ve had to pay out upon in the prior years.

Buyers also need to realize that with older appliances, things are going to break and cost money to fix. It is best to try to get some money as a closing credit in the sales contract, to compensate for older items; or reflect this issue in the original offering price.

Seller Won’t Pay, or First-Year Policy Expires or Existing Homeowner – Before you decide to buy, make sure to fully understand what is covered and what is not covered by the policy. And if you’ve had good luck with a company in the past, go for it. If you have no experience, consider this: what are the chances that you will have a loss that is actually covered, and that it will be more expensive than the annual policy cost plus the service visit fee? On that note, it might just make sense to differentiate between newer and older homes.

New Homes – When you buy a new (or newer) home, many of the existing warranties may still be in place. These could cover several of the appliances, so review them! And since the appliances are new, they should have fewer issues. As to electrical or plumbing items, they are pretty rare in newer houses and there may be a developer warranty anyway, depending on the state. Overall, you might be better off saving your money and just paying claims, when/if they arise, rather than paying for a home warranty.

Older Homes – Older homes have a higher chance of something going wrong that is not under a warranty. But if there are new appliances or updated systems, you may not have issues after all. Even if they need replacement, many policies will only pay the depreciated value on older appliances. Read the full policy carefully if you plan to purchase a home warranty to make sure you know exactly what is covered.

Overall, it seems the restrictions on claims, exclusions, and customer service issues tilt somewhat against paying $350 – $500 per year for a policy that you may not actually use.

Now what would help the industry is if the companies were able to better convey upfront what is andisn’t covered – so there are less misunderstandings. Regardless, those are a few items to consider. Now you can make you own decision, based on your house and appliance ages, and your tolerance for the potential that you may have to cover an entire loss.

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When Your Home Won’t Sell: Accidental Landlord

So you’ve had your property up for sale and you just cannot get it sold. And while you prefer not to become a landlord, you are thinking that renting it out for a while may be the best option – at least you would have some money coming in. You have become an “accidental landlord.”

Let’s touch on a few issues herein to give you some guidance on how you might want to proceed if you are in this situation. You will need to think it through and make the decision that’s best for you….but let’s consider your options.

Re-Quadruple Your Efforts to Sell the Property

when-your-home-won't-sell-accidental-landlordFirst, give it one more “college try” to get your property sold. Maybe lower the price and/or do a short sale. Has your real estate agent offered a bonus to the buyer’s agent? Are you helping by keeping the house clean and available for viewing? Doing enough advertising? And make the property appealing to a buyer – maybe with a credit for new flooring or appliances? These all cost money, sure, but otherwise, you’ll end up being a landlord.

It’s especially important to step up your efforts if you’re moving out of town — you really don’t want a rental property so far away. So, re-quadruple your efforts to sell the property first, while you move forward with the options below.

The Landlord Option Seems Inevitable

Since you’ve had no luck selling it, let’s make some some smart choices that will help you in your first landlord assignment. You have two choices:

  • Having the Property Professionally Managed – Recommended!
  • Renting and Managing it Yourself – Not Recommended!

Professionally Managed

Since you do not have experience with this, hire someone to manage it for at least the first year(s). Typical cost should be 7-10 percent of rental income, plus re-rental fees for new tenants. When that happens, the management company can advertise it, show it, take rental applications and do credit checks, draft the lease, do the proper move-in and move-out procedures – so you don’t have to. Trust me, they work hard for their money. And if you work full time, you’re not handy, you’re moving out of the area, or have never been a landlord before – a professional property management firm is the way to go.

Make sure to interview several management firms, get references, call them, and review their insurance.  Don’t forget:  you get what you pay for!

One thing you can and should do to help, is place rental ads yourself for your property – just put the management company’s telephone number on them. Flood the Internet with ads and include nice pictures on Zillow, Craigslist, etc. – it certainly can’t hurt, and most sites charge very low prices, or are free!

Managing Yourself

Managing yourself can work well too, just make sure to educate yourself as much as possible. A few items to consider are the time it takes to show the property, draft a lease and get it signed, and evaluate potential tenants based on their credit, income, legal and rental history. Talk to experienced property owners to learn the ins and outs. Then monthly, you must collect rental checks, pay bills and handle issues about six times a year. It can be a lot of work – but you will learn over time what works for you.

Overall Rental Property Ownership

The key to making life easier and earning money is to get good tenants to stay. Landlords, and accidental landlords, do this by keeping properties in good shape, handling issues when they arise, and treating tenants with respect. It also helps to ask market rents or even a little less, to get a better selection of quality renters. All of the above are what most long-term, individual rental property owners have learned over the years.

Consider these options and educate yourself as much as possible to make the right choice for you – America’s newest accidental landlord.

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