Home Warranties Stink

Adam's house is pretty old and he thinks he needs a home warranty. It's a bad idea for so many reasons, says Dave.

QUESTION: Adam, who owns a 40-year old house, asks Dave about home warranties. Role-playing Dave gives Adam his answer.

ANSWER: Home warranties are awful. Let’s take a second and open a home warranty company. If we were going to give a warranty to a guy with a 40-year-old house, we would look at a lot of the items he has that we think will break and exclude them from the warranty, because we don’t want to cover something that we know is going to break. We opened this company to make a profit, and we can’t do that if we cover a bunch of stuff that we know will break.

Another thing we would do is get some statistical analysis. For example, on a heating and air unit that is 4 years old, we would get stats that tell us we would replace a certain number, say 15, out of 1,000 each year on average. We would know our cost to replace the things in the house, and that would be the cost of our warranty. Then, when you add in paying our secretary, marketing costs, all expenses and to provide us with a profit, that would give us our home warranty price.

Ultimately, out of the 100% price of a warranty, 10% goes to overhead, 14% goes to the cost breakdown that we talked about earlier, and the rest goes to commissions, marketing and profit. That means for $14 out of every $100 that you pay for, you could cover it yourself. I don’t believe in home or extended warranties for that exact reason.

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