Do you remember that feeling of excitement when you’re at a car dealership and test driving that new car? Then, the car salesman convince you that this one particular car is perfect. You drive off the lot enjoying that new car smell. Then, after a few days, reality sinks in. You have to pay for this brand new toy and you start having buyer’s remorse.
I used a car example, but I guess this could apply to almost anything. Well, that is kind of how I feel right now, except, I didn’t buy a new car. I bought new home warranty coverage from a different company. Here’s what happened.
I bought my first house two years ago. When I bought the house, I got a home warranty with Old Republic that came with it and renewed that warranty for another year. The first year I bought the house, I lived in it and had roommates. While I was living in the house, I had to use the warranty a few times. Mostly, this was either for the refrigerator or the garage door. For some reason, especially with the garage door, the fix that was implemented was never the best.
After I moved out, I rented my home and used a property manager to help manage the property. I’ve noticed that my tenants also had to use the warranty for a light fixture in the bathroom and for the garage door.
Now, my warranty was set to expire recently. But, because of the busy season, I wasn’t able to renew it before it expired. Well, I got an email from my property management company asking permission for them to spend $350 to replace the garage door motor. They indicated that my home warranty had expired. Because I’m overseas, it’s difficult for me to take care of things back in the States. So, I went ahead and authorized the expenditure because I want to ensure that my tenants are taken care of. I figure I would deal with the expired warranty later.
The Surprise
I called up my home warranty company and told them that I wanted to renew. They told me that I was ineligible to renew. However, not only were they not able to renew my home warranty, they couldn’t or wouldn’t tell me the reason why. I felt so rejected. It’s like being dumped without knowing what went wrong.
I couldn’t tell if it’s because I used the warranty too many times and maybe they were losing money from my account, or if maybe they don’t renew for more than two years as part of their policy, which I think is what my property manager was trying to explain to me. I just wasn’t sure. Old Republic did give me a number to call for alternate coverage but I chose not to utilize it.
Before I continue, it might make sense to explain the the coverage I had with the Old Republic.
Old Plan
With Old Republic, the plan was simple. If anything broke (like a washing machine, etc, I (or my tenants) could call to get service and a technician, plumber, handyman or whomever would come to the house to fix the problem. No matter the cost, I would only be responsible for a $100 service fee. So, basically, it costs me $100 to fix anything in the house that’s covered under the warranty.
I was fine with that cost because, prior to utilizing my warranty, I had to spend a lot more than that to fix things in the house. Indeed, I was so ignorant of the whole thing that I didn’t realize at the time that I had a house warranty until months later when a friend pointed it out to me. I felt like such an idiot, but I digress.
I didn’t shop around or anything because I’m lazy and if it sounds like a good deal, then why bother.
Anyway, the first year I paid around $650 a year for the home warranty. The second year, I opted to pay monthly and that came out to be $59.17 per month, which adds up to $710.04 for the year.
The Recommendation
I didn’t want to take the recommendation from Old Republic. They didn’t recommend a company per se, but an organization that can help point me in the right direction to find coverage in my area.
What I did was, I contacted my property management company to see if they could recommend a company. They had two companies in mind, one of which was Old Republic. Hahaha. But they suggested another company and I gave them a call.
The sales guy that helped me on the phone was helpful. My house was covered. They guaranteed that someone would come out to the house in 24 hours if I (or my tenants) needed assistance. But the service fee would only be $45. I made him repeat the number, because I couldn’t believe it was that cheap.
The yearly amount was normally $500, but the special they had was $450 if I paid up front. It would have been a little bit more if I paid monthly.
Because I wanted the security of the warranty, I went ahead and said I would pay the up front cost. In my mind, not having the warranty cost me $350 to fix the garage door, which is almost what it would cost for the whole year to have the warranty in place. This way, if anything else happens, all I would be responsible for is $45 at a time.
Then the sales guy said that there was a multi-year option special that I could get and he recommended I take it. Let’s break this down further.
New Plan – Multi-Year Special
The service fee would remain at $45. So, that’s the amount I would pay if someone came to the house to fix anything. I didn’t mention this before, but if they were unable to fix it, they would replace the item with a brand new one at no cost to me. I don’t see that happening too often.
Moreover, I could lock in the price now and get coverage for 6 years, at the price for a 5-year coverage. In other words, I get a year of coverage for free. The total cost is $1875 or $312.50 per year.
The best part is that if I were to cancel the plan (for any reason), or sell the house, I would get my money back for any coverage I haven’t yet used. Moreover, If I bought another house (which I’m planning on doing), I could transfer my coverage to that house as well.
In my mind, I’m thinking that I wouldn’t have to worry about the cost of fixing appliances, etc, for a whole 6 years. I also wouldn’t have to worry about my coverage expiring. Plus, since I can cancel at any time, and get my money back for any coverage I didn’t use, I maintain flexibility in case I don’t like working with the company. Win-Win.
Buyer’s Remorse
Honestly, I don’t know if I made the right decision. Part of the issue is that I had to put such a large purchase on my credit card. That means if I don’t pay off my credit card bill next month, my credit score is going to decrease. This goes to show you the importance of having an emergency fund. Although, this doesn’t really count as an emergency anyway. But it’s good to have money set aside instead of doing what I do and use my credit card as my emergency fund. I’m tempted to take the money that I was going to put towards my student loans in May and use that money instead to pay off the credit card.
There is a decent possibility that I will be getting extra income in May as well. I was going to use that to contribute more to my Dividend Portfolio, but instead, I will use that towards paying down the student loans. It won’t nearly cover the $2000 payment I was hoping to make in May, but every little bit helps. But, the collateral consequence of this purchase is that my student loans might be paid off in November instead of October. I say might because I’m still hoping to pay it off by October with extra income I will likely be receiving in June as well.
Moreover, an increase in income over the summer will hopefully help me pay off the student loans on time. I’ll have to wait and see because I will also have increased expenses (including the purchase of a car, and therefore car payments, as well as higher rent payments, etc).
I think I made the right decision, but I’m not sure.
Conclusion
It’s amazing how one little thing can set you back. My intention was simply to get coverage for a year. But, for whatever the reason, I thought it was a good idea to lock in coverage for the next 6 years. Only time will tell to see if this decision works out in my favor. People might think having a home warranty is a waste of money, but I disagree. To me, it’s kind of like having insurance. It’s better to have it and not need it than to need it and not have it!
What do you think? Do you think I should have made that purchase? Are home warranty companies so prevalent that I could have shopped around and gotten a better deal? What would you have done differently?
Let me know your thoughts by commenting below.
Hello DP. For any big spending … buyer’s remorse is to be expected. Since you are renting out your place it makes absolute sense to get a warranty. Make sure to payoff your credit card 🙂
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Yea. Paying off the credit card as soon as possible is definitely the plan.
If most people gained more from having an insurance policy than they paid in premiums, insurance companies would go broke. Most people are going to pay more in premiums than they will collect in benefits. People who are smart buy insurance only to protect themselves from unusual expenses they cannot afford.
That new plan costs $312 per year but it costs you $45 to get someone to the house. I suspect that if they recommend replacement, they will cover only a very low end product and will try to up-sell you to a better product, for which they will collect a sales commission. Your $45 will cover the majoirty of repair bills.
Home warranties may be a good idea when you purchase a new home because you have little idea about the age and quality of the covered items or about the maintenace provided to them. Also many new homeowners have cleaned out their savings so they really can’t afford a problem. However, the overwhelming majory of homeowners would be better off in the long run putting aside an amount of money every month toward home repairs and using that when things do eventually break.
Raan, you make some good points. And I have no doubt that the home warranty company is making money – but mostly from the fact that fewer people make claims than they pay in premiums.
The issue though is whether a person is comfortable with accepting the risk of having to take care of the bill without the benefit of having the warranty.
Setting $45 (or whatever amount) per month for repairs is absolutely great advice. For me though I have a problem in that I will spend money that I have available to me. I tried saving for other goals and “always” end up using the money for some other goal. There have been two exceptions for me. Money that is set aside for retirement in my 401k and IRA are never touched. Also, once I buy stocks in my dividend portfolio, I never sell (unless something drastic like the company is going out of business). But all other money I have eventually gets dwindled down to zero.
I realize this is a behavioral problem but I know myself and I will likely use that money.
There is always the concern that even if I set the money aside, of several items decided to break down at once (very unlikely I think), the expenditure might be prohibitively expensive. But, I realize that prepaying warranty for 6 years might be overkill and not necessarily the best approach.
From a risk perspective, I sleep better at night having the warranty. Quite frankly, the fact that I made such a purchase is reflective of how unnerving I felt when I was without the warranty.
But I know it’s not the only or even best way to go. I’m just wondering though whether spending such a large amount of money was the right thing to do at this point in my life as I try to meet my financial goals for the year.
Thanks for the comment Raan.
DP –
If this brings you piece of mind, then understandable. Hard pill to swallow. Still want to be in the real estate game? Hmm…
-Lanny
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Yea, but maybe you should ask me that question when I have my first tenant turnover. I’m sure it’s going to cost me thousands to clean up the place.
Everyone wants to earn more 😉 Its normal, all salesman does it and makes hiden things. I just realized i paid more for my house small renovation, bet it has to be done 🙂
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I don’t blame insurance companies for making money. I think I got good value but only time will tell. Hopefully, the renovations went well.
FWIW, your score will decrease no matter what you do. Credit utilization is calculated from your balance when the statement closes, not how much you carry month to month. It shouldn’t impact your score significantly though.
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I think my credit card reports my balance on the 20th of every month. So, even if I can’t pay it all off, if I can substantially pay it down, then that would be a good thing. We will see.
Hi DP, This is basically an insurance policy. The rule of thumb with insurance is to cover losses that you would not be able to cover yourself. Only you can answer this question. Whoever sells these products is in the business of making money so on average they will spend less covering your claims than you pay for the insurance.
Fair enough. Honestly, whether I can cover it or not depends on what gets broken and how frequently. This way, I don’t have to worry too much about it and I guess it’s more peace of mind than anything.
I feel the same way some large purchases as well. If it brings you comfort and/or at least some piece of mind, you’ll likely find it worth it. Insurance and proper risk coverage are important.
Overall, I’m still happy being a “passive” real estate investor via Fundrise and traditional REITs.
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Being able to sleep well at night is important Mike so I agree. I like the idea of investing passively. One of the best ways to go if you can make it happen.
Hi, DP. I’m comfortable going without the home warranty, and I set aside money to cover home expenses. However, as Lanny said, it’s understandable to have the warranty if it brings you piece of mind. It sounds like you’ve given this a good deal of thought, so I’m sure you came to the best decision for you.
By the way, the write-up of you thought process was terrific…. very easy to follow along. Nice work.
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Thanks ED. Yup, it definitely gave me the piece of mind. I just have to figure out how I’m going to come up with the money to pay off the credit card.
I am not the best when it comes to credit scores, but I am pretty sure that not paying off a credit card completely by month end won’t lower it. I know credit focus on usage and they recommend usage of 30%. Meaning if your credit limit is $1000, try to use only up to $300 on the cards and have the rest open/ available. Length of credit is a thing too. They like seeing consistent payments like on student loans etc. Although the downside of not paying off the card right away is the ridiculous amount of interest they charge for carrying a balance on it. I am the same as you and try to always pay mine off sooner than later to not have to pay extra or any interest at all.
Div Daze, unfortunately, that’s not the case. If I don’t pay off my credit card, that impacts the credit utilization ratio which does indeed have an impact on the score, and that results in it going down. It has happened to me in the past. As ridiculous as it sounds, I check my score every week to ensure everything looks good. It’s a bit overkill, but I watch my great credit score like a hawk. Trust me when I saw that if I don’t pay off the credit card, the score will go down. It’s not a question of if, but a question of how much. But, I do agree with you that keeping a low balance (under 30%) is good, as well as making consistent payments on your bills.
DP,
I wouldn’t stress too much over the money. Sure the warranty company is there to make money. But part of how they do it is being able to get better prices on fixing things and doing simple things themselves. I’m in the process of home buying now and I’m thinking of my frugal landlord. We have a great place in a prime location. He is having trouble renting out place now because he is in a different state and too cheap to make some common sense repairs. Let’s put this in perspective he just had a steady tenant for 3 years. He is trying to rent our apartment. But he has a light fixture that is hanging loose, a downstairs carpet that really just needs a professional cleaning and will look like new, and a microwave. We are leaving July 31. He is trying to rent the place August 1. But has done nothing to make the house presentable to a renter. The rent isn’t cheap. He wants $2,400 a month. Think about that. Losing $2,400 or more per month for failing to make $400-500 in repairs. If the warranty service is good and your tenants are happy they may stay longer. Also you don’t have the headache. The only thing I would worry about with the 6 years is if the service isn’t good you made quite a commitment to them.
Great point Seedling. The one thing though about the six years is that I can cancel at any time and I get my money back for all the months I didn’t yet use. So, if they have crappy service, then I can always leave. I also found out why my original company wasn’t able to take me back at the time. It’s because I owe them a month’s payment. I didn’t realize until I got a notice in the mail. I was trying to renew but couldn’t because I wasn’t current. As soon as I became current, they wanted to renew. I’m sure now it’s the person I was talking to initially, but they lost a great client for no reason. Had they told me that was the reason, I would have paid for it and get current. But, they foolishly kept me in the dark and wouldn’t give me a reason why I couldn’t renew. They didn’t even tell me I was not current. Anyway, I’m glad it happened because I found a much cheaper company who does the same thing.
In terms of service, it’s not really the company I’m with who will be making the repairs. But they would be calling local folks to do it. I’ll definitely watch out for poor service because I don’t want my tenants to be unhappy just so I can save a couple of bucks here or there. I’d rather pay more and have happy tenants and vice versa.
Thanks for the comment Seedling.
Hi
I will not go for the insurance purchase. I will rather self insure on my own.
Ben
That’s certainly a viable approach Ben. Your approach might actually be cheaper or even less stressful in the long run. I just didn’t want to take that chance.