By Contributing Author

Reading through the recent announcement from the Service Master conglomerate that they will spin off their American Home Shield firm to a separate publicly-trading entity, a question arises – what exactly are home warranties, and how come it is such a profitable industry in which one company can make over 1bn dollars a year from? How popular are home warranties, where, and is it a smart choice for the end client?

A home warranty is essentially a service agreement which has some characteristics similar to an insurance, but unlike homeownership insurance which is mandatory by U.S banks in order to get a mortgage or any form of secure loan against the house, a home warranty is not. The home warranty service agreement guarantees the following things (may vary between different companies) :

• Your electrical appliances are fixed or replaced upon breaking down
• Home components like plumbing, heating, air conditioning, ducts, roof, sump pump, and septic systems are also covered against breaking down – if they do, they are either replaced or fixed by the service provider
• You can also extend your warranty to exclusive, high-end, components, like a home spa, jacuzzi, or a pool, and get coverage against these components breaking down

Needless to say, a home warranty is intended to secure homeowners from a situation in which an expensive appliance or component breaks down and leads to large, unexpected, spending. It’s also quite cheap with the cheapest home warranty programs starting at $30 or less.

What’s the catch? As it normally is in these domains, it’s the tricky Terms and Conditions that are likely to make to make several home warranty plans not worthy of the client’s time. There are two particularly problematic areas:

• Deductibles: it may cost you $75 per service call. Meaning, if something small breaks down and you want it fixed, it may be cheaper for you to just get a hold of nearby professional. For example if you have a small glitch in your oven and you need a professional to have a quick look it, it should cost less than $75.

• Cap: most companies make sure that they don’t pay you more than a certain amount even if something very expensive goes broke. The cost of replacing a pool heater may be $1,400 but most companies won’t pay a dime over $500 even if something that costs more than $500 goes broke.

So, which type of clients can actually benefit from a home warranty? Those who are at high risk – older homes with older systems and/or older appliances. If you’re in that position, paying $30 or $50 a month to spend an almost sure $500 spend during the course of the year on repairs does make sense.

Popularity and Where

Home warranties are more popular than ever before. Here is why:

• Companies are advertising (view this American Home Shield Commercial)
• Internet penetration is ever growing, people are exposed to more concepts in personal finances
• Home sales have picked up tremendously since 2008 and it is a common belief that if you have a home warranty in place you could sell your house for proportionally more than you pay for the warranty itself
• Companies have expanded their service to an almost nationwide level. Even small states like Illinois have 10 companies available.

Below are the top states in which a home warranty is popular at, based on where these home warranty companies have decided to set offices in, amount of online searches, and advertising targeting:

1. Texas
2. Arizona
3. California
4. Georgia
5. Virginia

It makes sense, too. All these states have a high level of homeownership and particularly houses (as opposed to apartments) where a home warranty policy can have more impact, as there are more components (unlike condos where a lot of the systems belong to the building rather than your apartment).

We expect this industry to further grow in the near future.