Las Vegas Property Management Blog, the G-Gram

Home Warranty Policies

Thursday, May 31, 2012

Blog Image Frequently, I am asked about home warranty policies and how come I am against using them in property management. I thought I would provide some facts for you to consider. Many clients think the home warranty is a great way to cover all the maintenance costs associated with maintaining a rental property for a yearly premium of $400 to $600. In my opinion, nothing could be further from the truth and here are some things to consider

First of all, the home warranty was not created for that purpose any more than the liability policy on your car will cover the costs of the changing the brakes, oil or wiper blades.

The home warranty policy was originally intended for the owner occupant to limit risks when selling or buying a home. Typically home inspections are done by buyers who insist items be fixed prior to closing Rental homes don’t have this inspection done as there is no buyer. Home warranty policies issued without the inspection have so many exceptions to existing condition in the fine print and limitations on coverage is such that the exposure for them is worth the risk. Chances of you hiring a lawyer should things not work out as expected are slim to none once you find out your lawyer wants a retainer and will not take the case on a contingency fee. The policy has monetary limitations on the amounts to be spent over the warranty term and these limitations are such that only repairs will be made. Replacement of large items such as an air conditioner unit will never occur. Sometimes a built-in microwave will be replaced, but they will only approve a counter-top oven because of the fine print. So many other restrictions apply.

Now consider that the trade fee ranges from $60 to $75 is roughly the same amount we pay for the service call to a plumber or air conditioning technician not associated with the plan service the home. Our current plumber charges $85 for the service call and the A/C Company we use charges only $75 for the service call. Plus our vendor will go when we tell them to and make the repairs necessary and not those dictated or allowed by the home warranty.

With the home warranty, In order to get anything done, you must contact the national insurance call center for the warranty provider which is normally located in a different state and time zone. It will be manned by minimum wage overworked individuals who are not at all concerned about the plumbing or air conditioning emergency at your rental property. These individuals will just be filling in fields on a computer screen which doesn’t have a special screen to make your claim urgent.

Once the information provided is input into the national insurance call center computer, the claim is routed out to the lowest bidding plumber or A/C technician (lowest bidder). The lowest bidder will be overworked, overbooked and underpaid by the warranty company. The contract the lowest bidder has with the home warranty company usually requires that a call to us or the tenant be made and scheduled some time with in the next 10 days.

Nevada Revised Statute 118A, commonly referred to as the Landlord Tenant Act, requires that an Owner or Manager respond to habitability issues within 48 hours of being made aware of the problem. Home warranty companies do not care about the State Law as it pertains to tenants and habitability issues and the warranty policy doesn’t address response time and emergencies or habitability issues. It the policy did that, then the home warranty company would not hire the lowest bidder and would have minimum performance standards for the vendors.

Remember, it will be the homeowner and not the home warranty company that breaches the covenant of habitability with the tenant for failure to respond within the prescribed limits. It will be the property manager who has to listen to the tenant complain and try to keep the homeowner out of court.

It should go without saying that it is unreasonable to think a tenant will accept being told that someone in another state will contact them about the non-working heating or cooling unit or backed up toilet within 10 days to schedule an appointment when the State Law in Nevada states that repairs to conditions affecting habitability must commence within 48 hours.

What most policyholders don’t learn until the claim is made is that while the air conditioner compressor is covered, the procedure needed and costs associated with changing the compressor are not. For example, in order to change the compressor, the refrigerant must be removed from the system and can’t be vented into the atmosphere as per EPA rules and regulations. It must be recaptured and failing to do this if caught will cost the lowest bidder his license and a fine of $25,000. This is serious but the lowest bidder can recapture the refrigerant for $400 to $600 dollars. Then a dryer that will have to be installed to remove all the moisture from the system after the compressor is installed. The dryer is another charge not covered by the home warranty.

Since you won’t be there to supervise this, the lowest bidder will probably tell you that the refrigerant he recaptured was full of acid and smoke because the compressor burned up and can’t be reused because it will void the warranty of the replacement compressor. So now you will need to buy new refrigerant and the policy only covers 1 or 2 pounds and your unit could need 5 to 10 pounds depending on whether or not your unit is a package or split type system.

Now we have another $100 to $200 in non-covered charges to pay because the cost of the refrigerant “just went up last week” according to the lowest bidder. The price increase is because the EPA controls those prices and want the refrigerant to be expensive so you won’t vent it into the atmosphere.

These fees are totally unexpected for something you thought was going to be covered for the trade fee. These extra charges can be anywhere from $200 to $800 dollars and that must be paid in advance, they will not bill me.

The lowest bidder won’t come pick up a check for these additional fees because that is not covered. I have to make an unnecessary trip to the property and wait to pay a technician and guess what, that is covered in my management agreement and I am allowed to charge $85 an hour while I wait. I have waited as long as 3 hours which adds another $255 to the cost of having a home warranty and education you're getting on home warranties.

I have had conversations with the lowest bidders who have stopped the warranty work altogether because of the stressful work environment that is created by the home warranty company because it is the lowest bidder who tells the homeowner that not everything is covered and has to listen to the owner rant and threaten him over all this. The home warranty companies usually make the lowest bidder call in and speak to an account executive who tells him what they will pay and if he doesn’t fix it he doesn’t get anything from them other than the trade fee you paid him.

Not enough to worry about yet? Now the lowest bidder tells you he has 13 calls ahead of yours and now that he has been paid will be back tomorrow or when the compressor arrives from the home warranty company’s preferred supplier (means you're getting a reconditioned compressor).

Now, the tenant can’t miss another day’s work or night’s sleep because of the extreme heat and wants to go to a hotel room at your expense. Guess what , this isn’t covered by the home warranty but is covered by statute which states that the tenant can obtain necessary services and deduct it from the rent. By the way, there is no warranty on the work done under the home warranty so if the policy lapses the money you just spent on all the extras could be up in smoke if the reconditioned compressor fails.

    Let’s examine the costs here:
  • $599 for home warranty
  • $60 for trade fee
  • $800 for non covered items
  • $255 for property manager for sitting around waiting on lowest bidder
  • $400 for essential services such as motels and meals deducted from the rent
  • -------
    $2114 total

This scenario is played out on a daily basis and I can tell you from personal experience that one tenant went 44 days without heat while the home warranty company and lowest bidder experimented with the gas valve on the HVAC unit and changing the cheapest thing first and hoping for the best as the policy was scheduled to expire in 60 days. I finally paid my regular HVAC contractor to fix the unit because I could not stand what was happening to my tenant and company reputation over this insanity. The gas valve was replaced in 20 minutes at a cost of $149 plus a service call. The tenant was allowed by the court to deduct 42 days rent and I terminated the management agreement when the owner complained that I did not make the home warranty company pay me.

I am a retired USAF jet aircraft mechanic and can tell you from experience that preventative maintenance programs work much better than crisis maintenance “I will fix it when it breaks” strategy does. I have been in this business for more than 40 years and have yet to seen the home warranty plan pay off for the owner in an investment situation.

A property manager not only manages your property he will also be managing risks and also his reputation. Allowing the home warranty companies to set the priority when it comes to fixing things that breach the covenant of habitability is only tempting fate. Property owners and their managers are big targets for those wishing to file a lawsuit. It is too easy for a disgruntled tenant to file suit in small claims court and win when their child gets hospitalized for dehydration or overheating in the middle of the Mojave Desert. Hard to win that when our only defense against those actions would be we have a home warranty your honor, it is their fault.

Owners are responsible for the property managers legal fees, but the property manager is responsible for his reputation. I cannot balance the concerns about the use of the warranty over the breach of covenant. The vendors I use respond when I call them. They do not take instructions from some National Insurance Center office in a distant city. Our vendors normally respond on the same day and cost much less than the lowest bidder. My advice: save some money and don’t buy a home warranty to cover your rental property.


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