Property Management Blog

Should I Buy a Home Warranty for My Rental Property?

Steve Schultz - Sunday, April 20, 2014
Property Management Blog

I am often asked by our landlord clients if they should purchase a new home warranty or continue an existing home warranty on their rental home.  Of course, they are looking for a “yes” or “no” answer.  However, I always give them the dreaded “it depends” answer.  I suggest that they should consider many things before they make their decision. 


The first question I ask them is if they are considering adding a new home warranty or continuing an existing home warranty.  If they currently have a home warranty that they have had for several years, I always recommend that they keep it. If they don’t, inevitably, after not needing it for several years, they will suddenly need to replace their air conditioning unit and because they just dropped their home warranty coverage, they will have to cover the expense themselves.


If they are planning on adding a new home warranty, there are many things they need to consider.  Let’s begin with, how old are the home and the mechanical systems (hot water heater, air conditioner, heater, etc.)?  If the home is a new build, there isn’t as much risk for things to go bad in the first several years.  Not to say that the newness of the house is a guarantee, but typically there are few, if any, major repairs on a new house for the first several years of ownership.  If there are any major repairs in the first couple years, they are typically covered by the builder’s warranty.  On the other hand, if it is an older house and one or more of the major mechanical systems is well beyond its design life, a home warranty may be a good hedge.  That way, if the air conditioner does fail and they have the warranty, they just saved themselves a bunch of money.


Another consideration is to look at what the home warranty does and does not cover.  Although most of the home warranties have many commonalities, they also have many differences.  The landlord needs to understand what coverage they are buying and shop for what best matches their needs.  They can choose if they would like to have extras like the washer, dryer, pool equipment, etc. covered.  It would be terrible if they didn’t find out the pool equipment was not covered until after it failed.  They should pay attention to the service fees too, as they will vary based on the warranty company they select.


I suggest that the landlord ask the various home warranty companies that they are comparing what their policy is for selecting and vetting the contractors they work with.  I also suggest they ask who some of their key vendors are, such as plumbing, air conditioning and heating.  Then they can do a search on those specific contractors to see if they meet the landlord’s criteria. 


It’s important for them to ask about how preventative maintenance is handled.  It is not uncommon that home warranty companies will not do any preventative maintenance.  I call this the “if it ain’t broke, don’t fix it” approach.  For example, we had a situation where a home warranty company was called out to make a repair on an evaporative cooler motor that stopped working.  While the repair technician was at the property, he noticed that the severely cracked drive belt was in need of replacement.  The home warranty company paid to replace the motor, but because the drive belt was still functioning, the technician was not authorized to do the preventative maintenance to replace the $10 belt.  Had we not asked the technician to replace the belt anyway at an additional expense, it would have cost the owner another $60 service call, not to mention a very upset tenant.  The upset tenant may have used that experience to decide not to renew her lease, which in turn could have cost the landlord hundreds or thousands of dollars in vacancy as a result.


Landlords need to ask if the home warranty company can work with property management companies.  Some home warranty companies will complete a service call and bill the property management company, or they will allow the landlord to keep a credit card on file with the home warranty company so that the owner is charged the service call fee when a request is placed.  Other companies will require payment from the tenant upon arrival of the technician.  This almost always causes problems, so I don’t recommend that landlords use these types of home warranty companies.


A couple more things you will need to understand to make a good decision… 


In the rental business, time is of the essence when it comes to repairs.  This can become more important for a repair that involves habitability or an emergency as defined by the Arizona Residential Landlord and Tenant Act.  Once the landlord has a home warranty company, the dispatched vendor does not work for them, their property management company or the tenant, they work for the home warranty company.  The interest of the landlord and those of the home warranty company may not always be in alignment.  Landlords should discuss this concern with the various home warranty companies as they shop around.


I have experienced some great vendors used by home warranty companies.  I have also experienced some not so great vendors that home warranty companies use.  Landlords need to understand that many new vendors sign up with home warranty companies as a way to generate new business quickly.  That’s not to say that new vendors cannot be good, but your property may be the testing ground for the home warranty company to figure out which are good and which are not.  Ask the home warranty company how long their vendors have been working with them.


I have had some great experiences with home warranty companies.  I once purchased a rental property for myself and placed a home warranty on it because it was an older home with old mechanicals.  It turned out that the heating unit had a cracked heat exchanger which meant the entire heating and air conditioning unit had to be replaced.  The home warranty company covered the entire expense without hesitation.  What a huge savings that was for me!  So home warranty companies can be a great asset.


The most common mistake I see landlords make is that they think that once they buy a home warranty, they will have no further maintenance costs for the property.  But keep in mind, home warranty companies typically have many exclusions.  So just because they have a home warranty does not mean the landlord’s maintenance worries are over.  They are still likely to need to come out of pocket for some maintenance expenses.


I think the last couple questions landlords need to ask themselves are, what is my risk tolerance, and, am I disciplined enough to set aside the money for the eventual major repair that will be needed at the property.  If the landlord feels like they need to have all the coverage possible, then adding a home warranty will help them do that.  Also, if they are not willing to set aside $50 - $100 per month for the major repair that is coming, the home warranty might also help in that capacity. 


The one thing I can tell all landlords with certainty is that although I don’t know what big ticket maintenance item will hit or when it will hit, I can guarantee that eventually it WILL hit.  So they need to be prepared for it in advance and weigh their options before it hits so they are in the best possible position to deal with it.