21-07-2020
Super User

The main purpose for writing this BLOG is to help investors and landlords of residential property to make a good business decision about whether or not to hire a home warranty company.

Essentially, home warranty companies act as maintenance insurance. The expectation is that the premium paid for the insurance will be less than the cost of the maintenance itself. It’s understandable that landlords might want to find savings in maintenance, as that is one of the larger expenses the landlord will suffer during the life of their investment.

Given that, we have to acknowledge that these insurers are in this for the money. It’s their business. They have to make money. They are betting that you will not need them, and the paid premiums will stack up making a nice profit for them. In keeping with this objective, it’s understandable that when they are called for services, they will look for exceptions to coverage policy. Years ago as an investor with multiple properties, I actually tried 3 different warranty companies because I couldn’t believe that it was a bad idea. I eventually figured it out.

I once knew the warranty services supervisor for a local warranty company. He quite frankly told me that they had weekly, Monday-morning meetings with the sole purpose of talking about how to find ways to avoid working for free. One favorite tactic was to tell a home owner that they would fix the problem, but because their system is not built to building code. Think water heater or HVAC system. Do make the warranty covered repair that they would have to first bring the system code and that work is not covered on the policy. What they would charge for this updating is going to be charged at market rate plus, often very much plus. There are many other tricks. They can be quite creative.

For the landlord, the problem can be even bigger than the obvious, incremental rip offs. In Georgia, landlords are obligated under the Landlord Tenant Act to keep a property in repair. The expectation under the law is that landlords will make repairs in a timely manner. Timeliness is often antithesis to  home warranty company response. An occupying homeowner may be okay with waiting hours or even days to have repairs made on their home. Landlords really don’t have that luxury. If the repair is not timely made, then the tenant has the right under the law to have the system repaired and then deduct the cost of the repair from their rent. When this happens the landlord has no control over the cost of the repair. They probably won’t even get a vote on whether the repair is really even necessary or the best solution.

I had an experience one time where-in the tenant reported that one of his zoned air conditioners was non operational. I arranged for a contractor to go to the property the next morning. Early the next morning my contractor called and told me that the tenant told him he need not come out because it was already repaired. He had called his own contractor. My contractor determined that the problem had been a defective relay switch on the compressor. The tenant’s contractor charged us $450 to replace the relay. My contractor told me the price was a little on the high side but the worst part of it was that the system had exceeded its economic life and he could have replaced the entire unit for $800. This was not a warranty job but the outcome would be very similar had it been so.

I’ve also noticed that technicians often respond with an attitude. It’s as though the landlord and tenant deserve less respect because it is an “insurance” job. The technicians often ignorantly think the repair is free for the landlord; that somehow the landlord is just gaming the system. They calculate that into both the timeliness of their response and quality of their service.

Perhaps a bigger problem than losing control of cost and timeliness of response as already discussed, is the impression made on the tenant. I have seen it take days and even a week or more to get the home warranty company to make the repair. When this happens the tenants are put to significant stress and inconvenience. This fact may weigh heavily on their decision to renew their lease. Plus, judges, when brought in to play, really do not like it when landlords are slow to respond to maintenance calls.

We know, unequivocally, that the single greatest cost of investment in residential property is tenant turnover. Whenever the property turns over, the property will need sprucing up to make it attractive when marketing for a new tenant. During this turnkey period the landlord suffers lost opportunity costs. Money is being spent and no money is being made while the property sits vacant.

It’s usually at least one month, even with very good professional property managers, to get a new tenant moved in. Even if we find a tenant within a few days of putting it on the market, which is not uncommon, the landlord is still beholding to the move-in date that meets the tenant’s logistical needs, without regard for the landlord’s financial interests. It is usually a full month minimum. This is why we don’t want tenants terminating their leases. We want content tenants.

For all of these reasons, I am unhappy working with landlords that choose to hire home warranty companies. Besides the cost to the landlord, for me it means there will be more trouble managing those properties. I do it though, because apparently I am not good enough at convincing landlords of how bad an idea it is. Some people, me included, just have to learn from our own experience. Maybe this BLOG will be part of my solution.

If you are seeking professional property management, we would love to assist you. We manage residential properties in the metropolitan area of Atlanta. We manage properties from Lawrenceville in the east to Dallas, Georgia in the west. We also manage from Peachtree City in the south up to above Cumming in the north, and everywhere in between. We have a big presence in Marietta. Our home office is physically located in Roswell, Georgia.

 

Daniel R. Wilhelm
Executive Broke
3 Options Re
alty, LLC., CRMC®
This email address is being protected from spambots. You need JavaScript enabled to view it.

The author of this Blog is neither an attorney nor an accountant. Nothing written should be construed as legal advice. Conclusions conveyed are outcomes based upon practical experience and should not be depended upon to be a common outcome of other similar circumstances. Consult with a professional before making tax or legal decisions.

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