Most homeowners are familiar with home warranties from when they originally purchased their home. Most real estate transactions involve the seller purchasing a 1 year home warranty policy for the buyer that goes into effect at closing.
The intent here is to minimize the seller’s liability and give the buyer peace of mind that if any systems have issues in the first year, they should be covered from a big expense by the home warranty.
Some landlords also purchase home warranties as a way of attempting to minimize big expenses on their rental property. If the air conditioner goes out, send the home warranty. Dishwasher not rinsing as it should? The home warranty will cover that.
So are home warranties some awesome secret that can turn expensive up front repairs into cheap annual premiums for savvy landlords?
Home warranties may just be one of the worst things you can do to your rental property and here is why:
It takes forever to get ahold of them
Starting a service call through a home warranty can take hours (yes you read that right, hours) of hold time to get through to them and start the process. That is, if you are able to get through to them at all.
Once you do get through to them, actually getting a vendor out to the property can take days or weeks from when you submit the request. While most traditional vendors can make it out to a property and often fix the issue within 72 hours of first contact, home warranties can take weeks or even months to fully complete the process.
The vendors they use are low quality
We know this one from experience. We once initiated a home warranty request for a plumbing backup on a house. After about a week, the home warranty company finally sent a plumber out.
The plumber fixed the backup, but also caused 3 of the toilets in the house to simultaneously explode sewage and flood the house.
The plumber that the home warranty sent said, “well, not my problem” and left the job site and claimed no responsibility for it. The tenants had to vacate for 3 weeks while the owner initiated an insurance claim to fix the damage. It was over $20,000 in work to repair the damage from the flood, not to mention 3 weeks of lost rent while the tenants were out of the house.
We checked the online reviews of the plumber that the home warranty sent and unsurprisingly, they were abysmal.
Tenants are unwilling (rightfully so) to wait that long for a repair
When tenants rent a home, they expect the home to be maintained well and any issues to be handled in a timely manner. That doesn’t mean everything gets instantly fixed the way it would if you were staying in a hotel and called the front desk for an issue in your room, but it does mean that standard repair requests should be completed within a few days.
While you as the owner may be willing to wait weeks for your air conditioner to get fixed in the middle of Summer so you can save money, a tenant will almost never be willing to do that, nor should they be expected to.
Because home warranties take much longer to fix issues than traditional vendors, this can lead to very upset tenants that very well might move out if it takes too long to get the repair done.
Which leads to…
Home warranty companies cause increased or extended vacancy
Vacancy is the number one expense you will have in owning a rental property.
One of the main reasons tenants vacate at the end of a lease is because they are unhappy with how repairs are handled.
Home warranty companies can ruin relationships with tenants causing them to move out early because the habitability repair was not completed in a timely manner or at the end of the lease because they dread having to deal with your home warranty company again the next time something goes wrong.
If you have a non-habitability issue but a major inconvenience (such as an air conditioner not working) you can find yourself having to give tenants a rent credit to make up for it, which can cost you more in the long run as well.
Home warranties increase your risk and liability
In California, you only have a “reasonable amount of time” to fix habitability issues. One mistake landlords often make is shifting the blame to the home warranty company when a repair is taking too long.
Using a home warranty to handle repairs does not remove your responsibility as a landlord to handle repairs in a timely manner. A heater is considered a liability issue. If your heater goes out in the middle of Winter and it take a home warranty company weeks to fix it, you are legally liable for not maintaining your rental property in a habitable condition.
Telling the tenant they just have to wait because the home warranty company is backed up or taking a long time to get back to you is not acceptable.
The bottom line
Home warranties sound like a great idea, but they actually do way more harm than good. They can take forever to get an issue resolved, not even fix the issue, create more problems in the process (see nightmare plumbing/sewage explosion story above) and turn a good landlord/tenant relationship hostile.
Unforeseen expenses can be daunting for landlords. This is one of the reasons you should always have a reserve on your property, typically equal to 6 months worth of rent, so you can handle repairs quickly and efficiently through a traditional vendor.
Avoiding home warranties and opting for a maintenance reserve is one of the wisest and best decisions you can make as a landlord. Don’t let a third party destroy your relationship with your tenants and your profits or increase your liability. Handle maintenance quickly and efficiently as it comes up and you will end up making more money in the long run than you ever would by relying on a home warranty.