How Do Home Warranty Companies Make Money?
By Victoria Baeker
Updated: April 7th, 2020
Home warranties are service contracts that protect homeowners from expensive repairs or replacements costs of covered systems and appliances. They can be purchased by homeowners at any time or by home buyers and sellers during the real estate transaction period. Many people assume that home warranty providers have huge revenues. How do home warranty companies make money? Before learning the source of income of warranty providers, let’s have a look at what a warranty plan covers.
What do home warranty plans cover?
The home warranty covers significant home appliances and systems, however, the coverage varies with the provider. The most commonly protected items include refrigerators, clothes washer & dryer, dishwasher, built-in microwave oven, air conditioning & heating systems, electrical systems, etc. But they do not cover structural damages caused due to fire accidents, or any other natural calamity.
Some home warranty companies in the United States give their customers the option to include items such as the pool/spa, septic pumps, garbage disposal, etc. at additional cost. Home warranty plans cover all types of homes, including townhouses, single-family homes, etc. and can be purchased at any time. They can be renewed annually or biannually.
How much do home warranties cost?
The price of home warranty plans differs between providers and depends on the number of appliances & systems covered. A basic plan may range from $350 to $400, and premium plans may cost $500 to $600 annually. The home warranty costs also vary based on the type & size of the home, and the location/state.
In addition, the customer may have to pay a service call fee and deductible upon filing a claim. The service fee may range from $50 to $100, but deductibles depend on the type of the warranty plan.
How do companies develop home warranty plans?
The companies develop home warranty plans depending on the frequency and severity of repairs and the age of equipment. The frequency of repairs is the rate at which a product fails (expressed in percentage), and severity is the cost to fix the faulty item (expressed in dollars).
How do home warranty companies make money?
Home warranty companies make money through various sources. These include:
1. Unused plans
Not all the time warranty plans come into use. Many times covered appliances & systems may work smoothly during the contract period. If the customers do not file a claim, the company can save the money spent on repairs or replacements, and increase their revenue.
2. New homeowners plans
New homeowners are the primary source of revenue for home warranty companies. After investing in a new home, no homeowners want to spend money on repair or replacement costs. To protect the investment, they buy home warranty plans.
Another reason homeowners purchase home warranties is that they don’t know whom to call when something breaks down. To avoid this hassle and obtain niche services, new homeowners like to invest in home warranties.
3. Existing plan renewals
According to reports, service renewals by existing customers form two-thirds of a home warranty company’s revenue. The home warranty companies have a network of contractors who offer unmatched services to customers to ensure their satisfaction.
Due to the blend of peace of mind and the quality of service delivered, existing customers renew their service contracts. The company renews the contract when the current plan expires and can be done through Email or phone call.
4. Real estate professionals’ recommendations
Real estate professionals commonly act as sales channels for home warranty providers. They educate the sellers regarding the benefits of warranty plans and encourage them to buy one. The plans can be transferred to the home buyer’s name during a real estate transaction.
5. Word of mouth
Word of mouth contributes to the revenue of home warranty companies, though not by much. Customers who have experienced niche services promote the benefits of home warranty plans among their friends & colleagues, encouraging them to buy a home warranty plan.
There are several home warranty companies in the United States. While some are genuine & offer top-notch services, others may be a scam. Therefore, make sure you comb through the fine print and customer reviews before buying a home warranty.
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