A home warranty may be a good idea when you buy a home as a personal residence. But warranties are never a good choice when we’re discussing home warranties and rental properties.
We’ve laid it all out for you right here in the introduction, but you’ve probably got questions. And don’t worry, we’ve got answers. This article explains what a home warranty is, why they aren’t designed for rental properties, and how relying on one can negatively impact your rental business.
What is a Home Warranty?
A home warranty covers major systems and appliances in your home in the event they need to be replaced, repaired, or serviced. It can include electrical, plumbing, water heaters, and HVAC systems.
The normal wear and tear that these systems and appliances experience is not covered by home insurance, so the purpose of a home warranty is to offer coverage for those gaps in your insurance policies. But, it’s important to note that home warranties don’t cover everything—there are exclusions and deductibles, and the warranty may not cover all the appliances and systems in your home.
There is no requirement to have a home warranty—as a property owner, you can choose whether or not you want to purchase a contract. Different plans offer different things, so it’s important to read the fine print if you choose to purchase a home warranty.
Home warranties were originally designed for owner-occupied homes. When someone needs to repair their home, the warranty company sends out a contracted vendor, and that vendor assesses the problem. Then, the company would decide if the repair was covered and paid for the warranty or whether the homeowner had to pay for the repair.
What is the Difference Between a Home Warranty and Landlord Insurance?
There is a key difference between a home warranty and landlord insurance. A home warranty covers the repair, replacement, and service of home systems and appliances. These plans are usually based on a one-year contract, are issued by a home warranty company, and are optional.
Landlord insurance provides property owners financial protection in case of an accident or disaster, such as floods, fires, and tornados. It protects a property’s structure and belongings against a “known peril” outlined in the contract. Most mortgage companies require homeowner or landlord insurance, so it is often seen as a requirement.
Are Home Warranties Designed for Rental Properties?
When first created, home warranties were designed for owner-occupied homes. To this day, having a home warranty for your personal home may make sense. It can help you manage costs with your appliances and systems.
But rental properties are a whole different ball game. Home warranties for investment properties almost never make sense. Let’s explore the four main reasons why a home warranty isn’t ideal for landlords and tenants.
Timelines
Timely repairs and maintenance are essential components of managing a rental property. For tenants, having to wait a long time for repairs or maintenance can be a deal breaker—it’s a very common reason why they leave a property.
Landlords and property managers should prioritize handling rental property maintenance calls. However, involving a home warranty company can create many hurdles. Home warranty companies do not benefit from responding right away or ensuring the repairs are done quickly and efficiently. They come from a world of loose timelines and a lack of urgency.
While this might not be a huge issue for owner-occupied owner-occupied homes, it can cause problems when tenants expect their needs to be met immediately,
When a tenant calls and informs you that the oven is on the fritz, you’ll need to go through the home warranty company to get a vendor to come check out the oven. And when the vendors take several days before they come to see the oven, it’s no wonder tenants become frustrated. Swapping out the oven for an air conditioner in the middle of summer in Orange County, you can see how forcing tenants to wait four, five, six, or even seven days to have someone even look at the problem is not an effective solution.
Choice of vendors
When a home warranty company handles your repairs and maintenance, you have no say in the vendors that complete the work. The company will send a vendor to your property without your input.
You might first think, “Great! That takes one more thing off my list of to-dos!” But, the reality is that you may find yourself saddled with a subpar vendor. Home warranty companies are notorious for paying their vendors very little. Because of this, you aren’t getting a top-tier professional and may deal with substandard communication, speed, and quality.
Not only do you need to be concerned about their work, but you also have to think about the experience your tenants may have if they encounter these vendors. Poor service to your tenants will reflect poorly on you as the homeowner, could lead to rent credits for excessive periods of loss of use, and hinder your chances of the tenants renewing their lease.
You want to ensure that the vendors working on your rental property know what they’re doing, complete the work efficiently, and are professional and respectful when interacting with your tenants. You can’t do that if you have no say over which vendor is assessing the issue and completing the work.
Band-aid repairs
Home warranty companies often pursue band-aid repairs in the name of “saving money.” Band-aid repairs are repairs that cover up the problem but don’t actually fix the underlying issue.
They’ll keep returning to re-apply the band-aid when needed, but the underlying issue keeps returning. While this may be in the best interest of the home warranty company, it can leave a bad taste in the mouths of your tenants. When tenants have to deal with an issue that is continuously coming back, their frustrations are bound to grow. Band-aid repairs are a surefire way to sour the landlord-tenant relationship.
The cost
While repairs and maintenance may be costly, home warranties are also quite pricey for what you get. The average cost for a home warranty in California is $650 per year, although the prices can be as low as $240 to as much as $1,080.
Most warranties have a deductible or service trade charge of $69 to $125 per item on top of the annual fee. So, if your washing machine breaks down and the sink backs up, you will have to pay two service trade charges. The minimum cost you’d pay to have a vendor come out would be $138—and this will most likely not include the cost of parts that will be added on.
Additionally, there are a lot of things that aren’t covered by home warranties. You may wait three to four days for a vendor to come assess the situation. Then, another day, the report will be submitted to the company. And after all that, you find out the repair isn’t even covered—you’ve already paid for the service call. Financially, it can be very frustrating.
Finally, you need to consider the potential ancillary costs of home warranty vendors’ slow and subpar work. These, like increased chances of a vacancy and rent credits, can quickly make the math of home warranties not pencil well anymore.
How a Home Warranty Can Impact Tenant Experience
Let’s walk through an example of what may happen if you use a home warranty or your investment property.
Your tenant calls you on a Monday to say that the HVAC system isn’t working properly—the air conditioning isn’t working, and there has been a strange noise.
You immediately call the home warranty company to schedule a vendor visit. You wait until Thursday—four days after your initial call—when the vendor comes to assess the situation. They come, they assess, and they submit their report.
On the following Monday—seven days after the initial issues were reported—you hear back from the home warranty company. You’re in luck. There is a broken damper, which can be fixed and covered by the warranty. They schedule their vendor to come back the next day to resolve the issue.
On Tuesday, the vendor arrives, fixes the problem, and sends you a bill for your deductible and the cost of the new damper.
It’s taken eight days to resolve the issue, and your tenants are less than thrilled to have spent over a week without proper air conditioning and a strange noise disrupting their lives. Worst of all, in three months, you get a very familiar call from your tenants and start this process again.
It’s clear why a home warranty is not a practical solution for investment properties.
Instead, rental property owners need to budget appropriately for major repairs that may come up. Setting aside 5-20% of your rental income each month, depending on the age and condition of your property, is a solid strategy for repairs and capital expenditures. This ensures you are prepared for them and they are anticipated operating expenses when they arise rather than painful emergency costs. And you’ll be able to work with a trusted, reputable contractor of your choice.
Secure Your Investment Property Using a Property Management Company
Put your money to better use by hiring a property management company. With a property management company in your corner, you’ll get an added layer of security that far surpasses a home warranty. You’ll have access to top-notch vendors, 24/7 tenant support, fast-acting professionals, and peace of mind.
At Good Life Property Management, we believe life should be enjoyed, not spent sweating the small stuff. That’s why we set out to make property management easy. We care about you, your property, and your tenant. And we do it all so you can Live the Good Life.
Schedule a call to speak with one of our Good Life experts.
Home Warranty FAQs
Is a home warranty worth it in California?
A home warranty may be worth it for some owner-occupied homes in California. However, a home warranty is not cost-effective for investment and rental properties and creates challenges for landlord-tenant relationships.
Who pays for a home warranty in California?
Home warranties are sometimes included when you buy a home and are often paid for by the seller or agent. But there is no requirement for a seller to buy a home warranty when they sell their home. Homeowners can purchase their own warranty if they so choose.
How much does a home warranty cost in California?
The average annual cost for a home warranty in California is $650, or $54 per month. Prices can be as low as $240 to as much as $1,080 per year, depending on your warranty inclusions and exclusions.
Steve Welty
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