The more you look at them, the more they look like sucker purchases.

The warranty business is growing large enough to be a competitive nuisance in some markets. That's because homeowners don't know any better.

This homeowner remembers 1994 as a bad year maintenance-wise. I came home one Friday night to find a big puddle leaking from underneath my ancient water heater. Had to pay time and a half to get it replaced over the weekend. My dishwasher, refrigerator, clothes dryer and assorted other breakdowns dinged me to the point that I looked into the home warranty policies that I had been hearing so much about at work. It sounded attractive to commit to $400-$500 a year to be covered for all those things that went wrong.

Then I came to my senses. The more I looked at them, the more home warranties came into focus as a sucker purchase. Here's why:

  • I was looking to close the barn door after the horses had run away. I had had an exceptionally bad year with home appliances and systems. The law of averages came back into play and none of the subsequent years has been as expensive.

  • The value of a warranty policy hinges on exactly what's covered. You have to read the fine print carefully to figure out the exclusions. Either that or wait until something breaks down and then haggle with the warrantor. Ever read an insurance policy? Ever argue with a claims adjuster? Most people would rather go to the dentist.

  • When legitimate repairs do need to be made, the warrantor has no incentive to provide anything more than the cheapest possible Band-Aid solution. Moreover, the repair firms to which they sub out the work generally are not ones I would choose to work in my home.

  • Warrantors are in the insurance business, and they make money. That means, in aggregate, the homeowners who buy the warranties pay out more money than they get back in repair value. It's like trying to beat the house in a gambling casino.

Contractor's Dilema

I got to thinking about this when I received a phone call from a plumbing service contractor in Southern California who was complaining about losing business to the warranty companies. "What can we do to compete against them?" he wanted to know.

California is a particularly strong warranty market. Some 80 percent of homes sold in the Golden State come with warranty attachments, according to the California Home Warranty Association. In many other parts of the country, utility companies are making a big push into the home warranty business. A few PHC contractors have even taken a stab at it, although most of those I've spoken with about it have found it an entirely different beast than the service business and more trouble than it's worth.

How do you compete against home warranties? Simply by pointing out the flaws just noted. Warranties purport to provide value that tends not to be present upon close examination. Homeowners don't know any better. It's up to you to clue them in.