The concept behind home warranty companies makes sense when you're buying a new house. With a down payment, closing costs and moving expenses, the last thing you can afford is a major home repair like a new HVAC system. That's why we asked the sellers to provide a home warranty when we bought our last house. We hoped it would cover emergencies that popped up over the first 1 to 2 years we owned our first house with a pool. It was also our first experience living in the desert where Arizona's summer temperatures remain over 100ºF for several months.
We wanted the home warranty to cover unexpected problems while we got to know our new house and build our team of home repair contractors. Our realtor was familiar with home warranties and handled the paperwork for us. We only realized this was a mistake when we found ourselves with no heat, the day after the movers unloaded. We might not have paid for the home warranty up front, but looking back over the last year's experience with our home warranty company, we realize our trust was misplaced.
Home Warranty Companies Price to Sell
When it took 3 months to get heat in our new home, our home warranty company told us their contractor had closed the problem as resolved … and we believed them. When the “heat repair” failed after 15 months, we proactively managed the problem because our house was 95ºF upstairs. But First American told us one thing, and the contractor something else so we don't know who to believe (Read Can You Trust a Home Warranty Company, for details of living without air conditioning for 4+ weeks).
When you look at the numbers, you realize that home warranty contracts can't really cover the replacement systems they promise. In one of the National Home Service Contract Association videos titled Life Expectancy of Your Home's Appliances and Systems, they include the numbers shown above. Sadly that's marketing hype, and reality is a lot different.
When I bought my 20 year old house, I knew the HVAC system was at/beyond it's projected lifespan. The warranty contract was meant to give me time to research and pick the HVAC company and replacement system I wanted.
With a 20 year old house and 2 heat pumps (upstairs and downstairs), one HVAC system was bound to fail within 1 to 2 years. The first failure happened before we moved in and we went without heat for 3 months. Failures 2 and 3 came 15 months later and it's been 6 weeks with no resolution by First American.
- Cost of home service contracts – for 2 years home warranty coverage, about $1,650 (higher for refrigerators, pool, etc).
- Year 1, cost of first condenser (exterior only heat pump components) – my guesstimate about $2,500.
- Year 2, costs that First American hasn't covered yet:
- Upstairs heat pump – needs a new condenser and independent cost estimates average about $2,000 with parts covered by manufacturer's warranty.
- Downstairs heat pump – needs a new evaporator with independent cost estimates about $2,800.
The home warranty industry began in California in the 1970s, primarily to support the sale of existing homes. It's surprising that the home warranty companies don't review home inspection reports to gain a better understanding of the appliances and home systems their service contract will cover. With a 20 year old house, you know the HVAC system is about to fail but the home warranty companies don't factor the age of a house into their pricing (Read: Budgeting to Replace Interior Home Components).
Home Warranty Companies & Band Aid Repairs
What's fascinating about the service provided by home warranty companies is their reliance on homeowners who know little to nothing about home maintenance and repairs. That's the only way they're able to get away with band aid repairs, that don't last long and definitely don't fix problems at their source.
For example, the first contractor sent out by First American told me he put 3 lbs of freon in our downstairs condenser. Even I didn't know the canister (green for freon) has to be weighed before and after (see scale under pink, R410A, canister), to determine how much was used. At $100/lb, that's pretty important because the price is escalating as production has been cut by 90% (read The R-22 Pricing Story Not Being Told).
The home warranty companies though, would rather pay a couple of hundred dollars for freon every few months, than replace an expensive HVAC system for thousands of dollars. You might not complain if the contractor arrives at your home promptly, and you only have to pay $75 per service call. That's until you realize some home warranty companies cap their cost at $10/lb … leaving you paying the other $90/lb for freon, and the price will go higher.
There are lots of hidden problems here when your contractor focuses on fixing the symptoms of a problem versus finding and repairing the source of the problem. My downstairs heat pump will need more freon every 3 months until it's repaired (needs an evaporator coil) or a replacement heat pump is installed. Worse, it's actually illegal to keep adding freon without fixing the leak!
There are lots more band aid repairs which homeowners don't realize. A friend who saw my first article on living without air conditioning, said “… found the big items (refrig/icemaker/washer/AC) extremely expensive to fix and our's are 11 years old. Our icemaker alone breaks down at least once a year. In 2015 we called them 4 times and saved more than the cost of the plan.” From my perspective, 4 ice maker repairs in one year = $240. She's probably paid more in service calls, than a new ice maker would have cost because the real problem was never fixed … and what about the inconvenience?
Home Warranty Companies Cost You More Long Term
So the challenge here seems to be whether homeowners want to make a commitment to proactively manage their homes or turn this role over to home warranty companies. The truth is homeowners don't have to go it alone. I've recommended for years that every homeowner needs a team of home repair contractors to handle the most critical problems. here are the challenge most homeowners face when dealing with home maintenance and repairs.
This should be a priority with every new home you buy unless it's near your old house, and I neglected to do this. I'm very happy with my new HVAC company, and you can learn how I found them, and the support they've already provided to me.
So what are you putting at risk with a home warranty company? A whole lot and I honestly don't think $500/yr is worth paying for a single phone number to call. You still have to manage things not covered by home warranty companies, and this will be harder when you haven't built a team of home repair contractors.
- Peace of mind when you don't know how far into the future an appliance or major home system will fail.
- Comfort as you'll live with problem at least 2 to 5 days because home warranty companies only contract with a few contractors who agree to work for lower hourly fees. Here's a Yelp review to illustrate … “First service request two weeks into the contract. Fix a leaky faucet. Three-days later, still trying to find a plumber who has an opening”. I have the $125 deductible and called 3-plumbers on Angies List. All could come out same day and the repair cost $69″.
- Most home warranty companies will send a problem ticket to their repair contractors but after that, they leave it to you to manage the process. That's where Angie's List is probably a much better and CHEAPER contractor referral strategy.Convenience as you won't be able to switch to a different contractor when the one assigned by the home warranty company calls to reschedule, after you've taken a half day off from work.
- Choice of home repair contractors is out of your hands, and the 3 HVAC contractors I got from First American all had Yelp ratings of 1 where I wouldn't talk to anyone lower than a 3.
- Money as you'll pay more for many minor repairs (Yelp example above) and you'll pay to fix the same symptom multiple times, the band aid approach, versus getting the source problem fixed up front. This can cost you money with higher utility bills, and you'll pay more for replacements when appliances and systems don't reach their projected lifespan.
- Choice of replacement appliance or system is controlled by home warranty companies, so you likely won't get an equivalent system (they replaced a Trane condenser with a Goodman, attaching it to a Trane air handler so it probably didn't perform as well … until it died).
- Contract limitations (and they change every year) will mean you end up paying more than expected because of caps on some repairs or materials (freon example above).