Owning rental property comes with its own set of challenges, and one of the biggest concerns for landlords is how to handle repairs and maintenance. As a solution, some landlords consider purchasing a home warranty, also known as a residential service contract. However, is this the right move?
Firstly, let’s understand what a home warranty or residential service contract actually is. Essentially, it’s a service plan that covers the cost of repairing or replacing various home appliances and systems if they break down while the contract is in effect. For an annual fee, landlords can have a semblance of peace of mind knowing that if something goes wrong, the warranty may cover it.
It’s important to note, however, that residential service companies are not insurance companies. They are regulated by the Texas Department of Licensing and Regulation (TDLR) under the Service Contract Providers program. Unlike homeowner’s insurance, which covers damage from unforeseen events like fires, theft, or weather disasters, a residential service contract is designed to cover failures due to normal wear and tear—things that are bound to happen simply due to the passage of time.
However, our experience shows that the practicality and value of these contracts are not always as clear-cut as they seem. Residential service companies, while not technically insurance providers, operate on a similar model: they collect annual fees and aim to minimize the payout for claims. This business structure leads to several complications:
- Coverage Exclusions: Contracts often come with a laundry list of exclusions, and if landlords aren’t careful, they might find that many issues aren’t covered at all.
- Service Fees and Coverage Limits: There’s usually a service fee to pay each time a repair person visits, not to mention there may be caps on how much the company will pay for certain repairs.
- Disputes over Preexisting Conditions: Some companies may refuse coverage by claiming that the issue was preexisting, even if there was no way for the landlord to know about it beforehand.
- Delayed Service: These companies often work with specific contractors who may be overbooked, leading to frustrating delays. In urgent situations, like an HVAC breakdown in the middle of a heatwave or freeze, tenants might be left in discomfort for an unacceptable length of time.
Given these drawbacks, landlords must exercise extreme caution when considering these contracts. It’s essential to read the fine print, understand all fees and exclusions, and consider whether the cost truly provides the intended value.
We generally advise against landlords relying on residential service contracts as a strategy for handling rental property repairs. Instead, we advocate for a more proactive approach to property maintenance, regular inspections to catch issues early, and building a solid emergency fund to cover unexpected repairs. This strategy not only helps keep properties in top condition but also fosters a positive relationship with tenants, who will appreciate prompt and reliable service.