A home warranty is no guarantee

By Liz Pulliam Weston

Most homeowners have never used a home warranty. In fact, some have never even heard of these policies, which are designed to cover the kinds of mechanical breakdowns that regular home insurance doesn't: clogged pipes, furnace failures, appliances that go on the blink.

The popularity of these policies, though, seems to be on the rise, especially as home sales slow and buyers need additional inducements to make an offer.

These home warranties, which are designed to cover existing or "pre-owned" homes, are different from the builder's warranties that typically come with a new house. In California, the policies are ubiquitous: Nine out of 10 existing homes in the Golden State are sold with a one-year warranty, according to the Home Warranty Association of California, compared with estimates of less than one in five nationally. Warranties in California are typically purchased by home sellers or their real estate agents to avoid lawsuits if something breaks in the first year. The policies also can give peace of mind to buyers who otherwise might not be able to handle expensive repairs.

A fee and a charge

"With home prices so high, a lot of people are tapping themselves out just getting into a house," said Art Ansoorian, spokesman for the California warranty association.

Here's how the warranties work:

For an annual fee of $250 to $600, the warranties cover repair or replacement of basic home systems such as plumbing and heating, plus major appliances. Air conditioning, pools, spas, wells and sometimes roofs can typically be added to the basic policy for an extra fee.

The warranty company contracts with local repair companies to provide service. If something breaks, the homeowner calls the warranty company, which arranges with the local company to dispatch a repair technician.

If the repair or replacement is covered by the contract, the homeowner just pays for the service visit -- typically $25 to $75 a pop.

Although most warranties are issued as part of a home sale, providers say a growing number of homeowners -- 55% to 65%, depending on the company -- decide to keep the policies after the initial coverage period expires. Many buyers are hoping to avoid repair or replacement costs on aging household systems; others simply don't want to bother with trying to track down their own repair technicians.

"Some people buy it for convenience," said Steve Burnett, American Home Shield's chief marketing officer, "so they don't have to think about who to contact if something goes wrong."

Do home warranties make sense?

But are home warranties a good idea?

Some MSN readers think so. One poster on the Your Money message board said his Fidelity National Home Warranty policy paid for an $800 electrical panel replacement, a $1,200 compressor for his air conditioning unit and then a $3,500 replacement of the A/C system itself -- more than paying for the cost of his policy.

Others report that they struggle even to schedule a service call and find it all but impossible to get aging systems repaired or replaced.

Tracy of Oklahoma City has been battling her warranty provider, American Home Shield, for nearly a year over a 17-year-old, leaking air conditioner. Tracy said the company replaced a similar window unit only after a real estate agent intervened on her behalf, and it is balking at replacing the second one.

"Summer is coming, and I fully expect the same round of service calls again," Tracy wrote me in an e-mail. "Home warranties are tricky . . . It would be easy to lose money."

Among the problems:

The contracts come with loopholes. You need to carefully read your service agreement to determine what is and isn't covered. Coverage for plumbing, for example, typically ends at your home's foundation, so leaks or breakages beyond that would be your responsibility. "Pre-existing" problems typically aren't covered, nor are breakdowns that result from poor maintenance or improper installation. The contract also may require that a system be upgraded to current building code standards -- at the homeowner's expense -- before it agrees to repairs.

People who have had problems say the more expensive the repair or replacement, the more likely home warranty companies are to invoke these exclusion clauses.

Regulation is spotty. Some states hardly supervise home warranty companies at all. Others, like California, regulate them more closely. Home warranty companies in some states have shut down abruptly, leaving homeowners with nothing to show for their premiums.

That's not the only thing that can go wrong. Sheila Anderson of St. Paul, Minn., was supposed to get a home warranty with the house she purchased three years ago. When she called the warranty company to report that her refrigerator had died, she discovered her real estate agent had paid for only a few months of service and then canceled the contract. (The agent finally refunded Anderson the $600 that should have been spent on the warranty; she used it to pay for part of a new refrigerator.)

If you're considering a warranty:

• Find out which government agency, if any, regulates home warranty companies in your state and check its complaint records.

• If regulation is loose or nonexistent, pick a company that has a long track history in your state and solid financials. (If the company is public, you can ask for an annual report to see if its home warranty operations are making a profit.)

• If someone else -- the home seller or a real estate agent -- is paying for the policy, insist that the warranty premium be paid in full for the term of the agreement before the sale closes. Check to be sure the amount is listed on the final escrow statement.

You don't have control over who does the work. The home warranty provider contracts with local service companies to perform the actual inspections and repairs. You don't get to choose, and scheduling repairs can sometimes be a trial.

The service technician also may try to pitch you unneeded services. Tracy's original repairman wanted her to pay him $300 to clean her air conditioner. A technician she hired on her own did the job in a few minutes for about $50.

Home warranty companies often favor repair over replacement. Repairs are usually cheaper, but that doesn't mean they're the wisest choice.

Aging, patched-together household systems can detract from the value of your home when it comes time to sell. Meanwhile, newer appliances and household systems are typically more energy efficient and can often pay for themselves within a few years.

According to Consumer Reports, most household appliances should be replaced if they're older than seven years or if the repair cost is at least half the price of a new unit. Here are samples of how long appliances and systems in a home should last.

Life spans for home systems and appliances
Item	Expected life (years)	Item	Expected life (years)
Central A/C	15+	Dryers	14
Window A/C	10	Disposal	10
A/C compressor	15	Freezers	16
Electric water heater	14	Microwave ovens	11
Gas water heater	11 to 13	Electric ranges	17
Forced-air furnace	15	Gas ranges	19
Gas or oil furnace	18	Gas ovens	14
Trash compactors	10	Refrigerators	17
Dishwashers	10	Clothes washers	13
Exhaust fans	20

Source: National Association of Home Builders

If you want control over what is repaired and what is replaced, or if your appliances and home systems are relatively new, a home warranty probably isn't for you. (With new systems and appliances, the minor repair costs you're likely to incur will probably be much less than what you shell out for a warranty.)

You still need an emergency fund

Home warranties are no substitute for an emergency savings or home maintenance fund. Most homeowners should plan on saving 1% of their home's value each year to cover maintenance and repairs, according to Eric Tyson, co-author of "Home Buying for Dummies." You can't shift all the risk of home repairs to a home warranty company because, as noted above, many fixes won't be covered by your agreement.

So when might a home warranty make sense?

• In the first year you own a new home, when money tends to be tight, a home warranty can temporarily substitute for a home maintenance fund.

• If you're trying to sell a house, a home warranty can give buyers some peace of mind and may reduce the chances of your being sued should an appliance or system break down after the sale.

• A home warranty also can work if your home's systems are aging and you're willing to settle for repairs if the warranty company won't replace whatever breaks.

If you do decide to try a home warranty, check with several companies and carefully read each contract to determine what is and isn't covered. You also might check with friends and neighbors to see who has warranties and what their experiences have been with various providers.

Despite the hassles she's experienced, Tracy decided to renew her home warranty since so far it's paid out more than she's paid in -- and she still wants to get that air conditioner fixed.

"We'll keep the contract as long as we stay ahead," she wrote. "There is certainly a point where the cost outweighs the benefit."

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.