5 Red Flags to Look Out For When Choosing a Residential Service Contract

By Attorney Ryan B. Bormaster

A residential service contract—also known as a home warranty—is an optional service agreement that protects core components of your home. A home warranty plan can save homeowners hundreds, if not thousands of dollars on expensive home repair services. However, as with all contracts, you’ll want to read the fine print before you sign. Attorney Ryan B. Bormaster shared his advice to homeowners on what to look for in residential service contracts.

Your home is one of the largest purchases you’ll ever make. It’s only natural to want to protect that investment with a solid warranty. However, you’ll need to be careful who you sign with. Here are a few areas to keep an eye out for, and tips to help protect yourself from people trying to fleece you.

While home insurance plans are usually required by law, they tend to be more concerned with catastrophic damage. They don’t cover areas like ordinary wear and tear or appliance replacements. That’s where home warranties come in.

Generally speaking, I’d argue that home warranties are 100% necessary. Your house, after all, is likely the largest purchases you’ll ever make. It’s extremely important that you take whatever measures necessary to protect that investment.

Unfortunately, there are plenty of crooks in the warranty and insurance space who fully understand this. They are more than willing to exploit you if you’re not careful. With that in mind, I’d like to go over a few of the red flags most frequently displayed by scam artists and poorly-managed warrantors.

1. Questionable documentation

Nobody likes reading contracts. They’re boring, they’re dry, and they’re usually long and confusing. But it’s necessary to suffer through them, or better yet, get an attorney to read through them on your behalf.

That’s because underhanded warranty providers are counting on you to sign documents you don’t read.

Good documentation will leave absolutely no questions about what it covers and how. More importantly, it establishes what the warranty doesn’t cover, such as clearly intentional damage. There should be no gray areas and no loopholes.

In short, the responsibilities of both the warranty holder and the company providing that warranty should be set in stone and understood by both parties.

One thing you should pay particularly close attention to is how your contract defines “pre-existing conditions.” Do not sign a contract where this is vague or poorly-defined. Sleazy organizations will use this phrasing to get out of providing you coverage on just about anything you can think of.

2. Feeling pressured to sign

Worthwhile warranty providers don’t feel the need to browbeat prospective clients into submission. They’re comfortable letting customers figure things out for themselves, and do things on their own timeline. They know at the end of the day their reputation will speak for itself.

Walk away immediately should a representative attempt any of the following tactics:

  • Refuses to show you documentation unless you pay. Asking to see a contract before you sign it or make any payments isn’t just reasonable, but sensible. If that request is met with a demand for an initial down payment, you likely aren’t talking to a warranty provider.  You’re talking to a scammer.
  • Limited-time offers. Home warranties are a long-term investment, much like a mortgage. An agent that’s pressuring you to make a split-second decision on one either doesn’t know how to do their job or is trying to fleece you. Either way, they’re not worth your time.
  • They contacted you. If you’re receiving any sort of cold contact from a third-party warranty provider, be wary. Scam companies such as Secure Home Warranty have been known to use misleading tactics to get consumers to purchase coverage.

3. Too many excessive fees

Most home warranties are highly customizable, with different levels of coverage. That much is to be expected. Where you should be a bit suspicious is when there seems to be a service fee for just about everything.

I already mentioned you should be wary of companies that try to charge you a premium just to view a contract. You should also look out for red flags such as cancellation fees, service fees, and so on.

Learn more about home warranty costs here

4. Details that don’t add up

Does the company you’re evaluating have a list of quality contractors on-call for warranty claims? What are people saying about the organization online? Are there too many reviews that read like they were written by actual people or a complete dearth of feedback? How long has the company been in business, and what are its customer service hours like?

A good home warranty provider will likely have a list of reputable contractors they call in as necessary. They will offer 24/7 customer service, a fleshed-out website with complete contact information, and plenty of positive reviews online. If the firm you’re evaluating does not meet those qualifications, it might be best to look elsewhere.

Finally, be wary of a company that offers prices that seem too good to be true. Because they probably are.

5. Unreasonable demands

My last point has a lot in common with the first one, but it’s distinctive enough to merit its own entry. A warranty company should never have to request intimate personal or financial information upfront. Details like your name and address are one thing, but until you’re actually signing on as a client, anything further should be cause for alarm.

You should also be wary of the following requirements:

  • A home inspection (carried out by the organization’s own investigators, obviously). While you should probably have a home inspection done before signing up for a warranty, you should be allowed to choose which inspector you use.
  • A contract that’s longer than one year. Most home warranty contracts are renewed on a yearly basis. Anything more is cause for suspicion.
  • The ability to only call on a single approved contractor. Again, most warranty organizations will have a list of contractors, but you should also have some freedom in terms of your decision-making here.

Bottom line—you should purchase a home warranty. Although it’s not required to own a home, and not as critical as homeowner’s insurance, it’s still another step you can take to protect your investment. Just watch out for scammers and low-grade warrantors, because these days, there’s no shortage of them.

About the expert

Ryan B. Bormaster is the Managing Attorney at Bormaster Law. The law firm practices in a number of areas including real estate law.

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