Home Warranties Called 'Lousy Deals'
In a recent -- and unusually puffy -- puff piece in a pay-to-play real estate publication, two agents sung the praises of home warranties. But in truth, home warranties are not warranties at all. They're service contracts.
And if you're thinking of buying a house that comes with one, you're likely better off asking the seller to credit you with the cost of the warranty at settlement.
My own experience with a warranty was abysmal. I knew what I was getting into, figuring that at worst, I'd be out a couple hundred bucks to replace my dying double oven. But I was not prepared for the runaround: appointment after appointment after appointment as technicians tried to fix it, then ordered parts that didn't fit or didn't work. And after every visit, I was put at the end of the line for the next time.
Finally, after several months of being without my oven, the warranty company paid to replace it. Sort of. They only paid part of the replacement cost, I could only choose a model from the company's list (which didn't include my brand) and I had to buy it at the company's store.
Elsewhere, a homeowner in Florida had an issue with the same company. Her refrigerator stopped working, but the outfit wouldn't replace it. After months of "a lot of screaming and hollering at people," they paid her only a portion of the money she thought she would get to buy another machine. Her overall experience: "It was terrible," she told me.
Unfortunately, we are not alone. According to research by Consumers' Checkbook, an independent nonprofit that rates services and businesses, "tens of thousands" of dissatisfied customers gripe to consumer agencies every year. Complaints include denied claims, service taking too long to schedule and repairs performed incorrectly.
Over the last three years, the largest warranty company has been the subject of nearly 28,000 complaints to the Better Business Bureau. Another firm -- which agreed to pay nearly $800,000 settle a suit with New Jersey when the state accused it of deception in denying claims -- is the subject of 10,000 claims.
Started in 1974, Consumers' Checkbook surveys consumers about vendors and service providers, then publishes its findings and advice in magazines and online. It started in Washington, D.C., and additional editions are now published in Boston, Chicago, San Francisco and a few other locales.
Every few years, Checkbook takes on home warranties and the companies that offer them. "For decades we have urged consumers not to buy home warranties," it noted in a February newsletter, its latest foray into the topic. "These plans are typically terrible deals for most buyers."
Checkbook advises people to think of these contracts as insurance policies. Insurance is designed for catastrophic events like fires or floods: events you can't recover from on your own. Replacing a dishwasher or furnace may be unpleasant and somewhat expensive, but for most homeowners, it's not a financial disaster. And paying out-of-pocket is often less expensive than a warranty.
Warranties are "actually quite expensive," Checkbook says. The home's seller usually pays for the first year of coverage, but if you renew, you'll likely pay a monthly premium ranging from $25 to $80. Moreover, even in the initial "free" year of coverage, there's a fee of $75 to $150 for the initial service call on each claim. And if the appliance is too costly to fix, you're probably not going to be reimbursed for the full replacement cost.
Then there's the "gotchas" -- too many "fine-print exclusions," as Checkbook calls them, to mention. But here's a few: One plan excludes damage to your oven if it occurred during the self-cleaning cycle. Water heaters are usually not covered, nor are window air conditioners, humidifiers, garage doors and stand-alone microwaves. Some companies demand records to prove you kept up with the manufacturer's recommend maintenance.
On top of this, the warranty company selects the repair firm. And even though these outfits boast about the quality contractors they hire, every contract Checkbook examined said the warranty company was "not responsible for the work they do."
When the publication randomly selected 20 HVAC contractors that have received its top rating for quality, it found that not one of them participated in a home-warranty program. Indeed, many contractors overwhelmingly disdained them: "They deny lots of claims, and then I got blamed for it" was a common complaint from repair services that had partnered with warranty programs in the past.
No wonder warranties seem to be money machines. In fact, Checkbook found one warranty firm that laid out just 57 cents to cover claims for every dollar it took in -- and it claims 2.2 million contracts nationwide. You do the math.
With all this in mind, Checkbook says homebuyers would do better to find out what the seller is paying for the warranty and ask for a credit in that amount at closing. That way, you can use those funds to cover future problems.
If you must have coverage, read the contract carefully to determine exactly what's covered, the limits of what the company will pay, and what fees you will be charged for service. While you're at it, check out the company's complaint history and reviews.
Says Checkbook: "Since these companies garner so many serious complaints, there's a good chance you'll change your mind about buying a home warranty in the first place."