Is a Home Warranty Worth It? An Honest Answer

A client recently emailed me a simple question: do we need a home warranty, and at what expense? I wrote back a long answer, because I have a lot of opinions on this one. Since it's a question we hear all the time, here's the full version.

The short answer is yes, most of the time. I'd rather have one than not. But the real answer depends on who's paying, where you live and what you expect a warranty to actually do for you.

What is a home warranty?

A home warranty is a service contract that covers repairs to a home's major systems and appliances. When something covered breaks, you call the warranty company, they send a contractor, and you pay a deductible. That's it.

It's not homeowner's insurance. Your insurance is there for things like fire or storm damage. A home warranty is for the everyday stuff that wears out and quits on you, usually at the worst possible time.

Why I always provide one when I sell, and why most sellers don't

I love home warranties when I'm the seller. When I sell a property I own, I insist on providing one to the buyer, because it defuses problems later.

Here's how it plays out. Someone buys the house in October. In June, they turn on the air conditioning for the first time and it doesn't work. I had no idea, because nobody runs the AC in October. But they're upset, and they want to argue about it.

My answer is simple: "Lucky I bought you that home warranty!" They call the warranty company, pay the deductible, and the conversation is over. For me, that's a small price to pay for peace of mind.

Most sellers don't feel the way I do. To them, a home warranty feels like a waste of money. Once the house closes, whatever breaks is the buyer's problem, not theirs. I understand that thinking. But being in the right doesn't stop the phone call. A warranty gives the buyer somewhere to take the problem besides you.

If the seller is paying, take it

If the seller is paying, why not? You only pay a deductible when you use it, and a lot of things are covered.

That doesn't mean it's perfect, and I'll get to the catches next. But if the seller is paying for it, even a warranty that only covers part of a repair is better than nothing.

The catches you should know about

There are real ones, and you should know them going in:

• They try to avoid paying when they can. These companies are in business to make money, and claims cost them money.
• There are limits on big-ticket items. A major system replacement may only be covered up to a certain amount.
• Age matters. If something is past its useful life, they may not pay.
• They fix before they replace. They'll almost always try to repair first, and sometimes that repair is a band-aid.
• You may not get to pick the contractor. They send who they send, and wait times can be longer than if you called someone yourself.

Read the contract before you sign it, especially the sections on coverage limits and what's excluded. That's where most of the frustration comes from.

Is it worth it if you're paying for it yourself?

This is where it gets harder. If the buyer is paying, it can look like a bad bet. The warranty company collects more in premiums than it pays out, right? So are you better off keeping that money and saving it for a repair?

It depends. If you're one of the "lucky" ones who ends up getting more in repairs than you paid in premium, it was a smart move. In that sense, it's no different than any other kind of insurance. You wouldn't go without health insurance or car insurance.

The difference is the size of the risk. Health and car insurance protect you from huge, life-changing bills. A home warranty doesn't tend to have payouts that big. So it's less of a must-have and more of a judgment call.

Who gets the most value from a home warranty?

I think an out-of-town owner gets extra value. The warranty company handles finding a contractor. You just coordinate and pay the deductible. If you live two states away and the furnace goes out, that matters.

The trade-offs are the same as the list above: longer waits, no choice of contractor, and repairs instead of replacements.

For the record, I don't usually buy one for myself. I have people I trust for repairs, and I'm local. Most homeowners don't have that, and that's exactly who a warranty helps most.

Which home warranty company do we recommend?

Right now, the Mike Team likes America's Preferred Home Warranty.

We research warranty companies every so often to see which one seems to have the best coverage for the cost. We also watch how they handle claims for our clients. In the past, we've switched the company we recommend over lack of responsiveness, how aggressively they fought not to pay claims, and price increases.

America's Preferred isn't the cheapest. But it seems to be a good value, and overall we're happy with the service they provide to our clients. If that changes, our recommendation will change too.

So, is a home warranty worth it?

There are pluses and minuses. Overall, though, I'd rather have one than not.

• If the seller is paying, take it.
• If you're selling, offer one, because it can save you an argument down the road.
• If you're paying yourself, it's closer. But for most buyers, and especially anyone who doesn't have a go-to repair person or lives out of town, I lean toward getting it.

If you're buying or selling and want to talk through whether a warranty makes sense for your situation, or how to work one into your offer or your listing, schedule a time with me or someone on our team at 21mike.com.

Mike Ferrante
The Mike Team at LPT Realty
www.21mike.com
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