Quote from @Ed W.:
@Axel Meierhoefer
Thank you for the very helpful reply. It provides an important step in the right direction.
From First American's site: "First American Home Warranty offers homeowners protection against costly repairs or replacements on their home’s covered essential systems and appliances through service provided by a large network of pre-screened contractors and qualified technicians. Founded in 1984, we are a leading provider of home warranties with the experience and strength of an industry leader."
How they define "essential systems" and appliances becomes critical and the need for truly understanding the fine print necessary. For example (and this will no doubt describe the problem incorrectly because I never purchased a property with the problem but general nature of what I'm describing is correct), maybe 15 or 20 years ago there was a new plumbing system available and went into a lot of new construction including homes in the mid and high end prices of homes in our area. The system had an inherent flaw and, if I remember correctly, a lot of the connections where various pipes were joined failed. To me, that sounds like a failure that First American would/should cover and, I'm speculating, does cover. However, do they also cover the substantial damage to drywall, flooring, perhaps ceilings, electrical, etc. that are the direct result of the inherent flaw of the plumbing system? My thinking says it should but no one from First American has ever called me for my opinion. :)
How do they define the plumbing system? Here is something that is part of the plumbing system that I believe should not necessarily be covered. My guess is that they are talking about the system within the house. A friendly competitor did some new construction. The general contractor tied the plumbing systems into neighbors lines, not into the city's lines. Neighbors bills roughly doubled and the new properties got no bills. VERY expensive to remediate but only a small part of the problem was within the footprint of the house. That same contractor installed something in every bathroom upside down or in the opposite direction it was designed to go relative to the water flow. I'm assuming that should be covered - but not enough info on First American's site to know for sure.
They mention leaking roofs. Do they cover faulty installation or just normal wear and tear? What about joists incorrectly installed, floors that weren't leveled correctly, flashing installed incorrectly, electric panel boxes that are faulty, driveways installed without expansion joints (I bought a house that had a foundation that was shifted the first summer because of the driveway expanding. Big cracks in the driveway and garage floor, what had been nice brickwork was left full of step cracks around 3 sides of the house, significant steel beam in basement shifted but not enough to lose its integrity but what if it had moved enough to lose its integrity and a good portion of the floor above it just sank a few feet. Are sump pumps covered? If so, if they fail is the water damage to a finished basement covered or just the pump replacement? What if it's got a battery back up. If the battery is dead and the pump fails, is that covered differently than a pump without a battery?
These things I've described are real things I've personally encountered and are only the ones that quickly come to mind.
My point in all of this is that repairs can be hugely expensive and how the insurer defines it coverage - in the fine print - matters a heck of a lot. Alex, do you have a policy I could read through? If it could be posted somehow that would be great but you could also send it directly to me.
Ed, I hear your points and I am sure they are all very valid.
A few things should be kept in mind, IMHO:
You probably heard about the term "chain of custody". I believe something similar exists and I would call a "chain of liability". I am not a lawyer.
1. We were talking about built-to-rent properties. A brand new home will only get permits for building, pass inspections and ultimately receive a permit to occupy if it was built to current building codes. That's the assumption. Are there builders who violate codes, possible. But, if they made a massive error, like your plumbing system example, I would put liability on them first, especially as long as the house is new. Most builders give 1 year or 2 years warranty on their work.
2. Let's say the builder used a system as required but the system itself fails. I had this happen in a house where a floor heating system was installed. After a few years, it was found that the plastic pipes had a chemical reaction with concrete and started disintegrating. A lawsuit was filed against the manufacturer of that system. I as the owner of the house had two choices: a) rip up all the floors and replace the bad system with a new one or B), get the most massive, modern, A/C heating system I could have never afforded. I chose option B because while all renovation costs were covered, the rent I would lose was not. We disconnected the floor heating, got this massive system installed on the roof, installed all new vents for heating and cooling, connected to all utilities, got a small solar system to cover electricity costs to run the new system, all paid for by the vendor of the original heating system. That is one level of liability down from the builder.
The next level down in my view is the extended warranty approach for everything. In that case the equipment is covered including related repairs to drywall, etc. but probably not everything you mention in your examples.
The insurance to pay for costs not covered by other liabilities and warranties is next, although I am sure you are right that some issues to fix a system might not be 100% covered. In this case, the question is: How did the issue arise? If it wasn't a manufacturer's fault and it wasn't the builder's fault, and it wasn't equipment fault (covered by warranty), that leaves the tenant. For that, I always have renter's insurance and the wording in the lease agreement about the proper use of all equipment and systems provided. I would call that Tenant Liability.
Ultimately there is our own reserve . We are basically the last link in that chain. We want to keep our property in good working shape and if all other levels fail, we might have to tap into our reserves. My goal on that is always to focus on CAPEX-level issues and avoid all maintenance-level issues. It's not 100% possible, but a lot can be covered in a new house.
If you take that chain of liability and aim to put as much of the cost into the purchase price, your loan/mortgage that is paid for by your tenant covers almost all issues.
I am writing this as a strategic approach. I know that the reality is always different but when going after BTR projects I suggest trying to get as close as possible to this approach to avoid nasty surprises. On the flip side of that coin, you sit at home and don't take any action, don't make any investments because many many things could happen. I feel we want to take action, have great strategies, and deal with unforeseen issues as they arise.
If we prepare as best we can, the cases where you end up holding the bill should be rare.
