The new home warranty program that a builder 'must' use in Calgary is mandated by the Alberta Government. I view this warranty to be completely unnecessary and counter productive. This may not be the most common view among industry participants, however, as you will see below there are significant reasons behind this perspective.
Here are my top reasons why there should not be a government required home warranty program
1. The government mandated warranty isn't even a warranty, it is cash paid to an insurer. The insurer is not a builder and has little capacity to act as a builder. Why is an insurance program mislabelled as a warranty? This makes no logical sense to me. Most of us are aware how often reports are in the media about an insurer finding loopholes to avoid a claim. A lot of the resources of an insurer are spent avoiding paying claims rather than fixing houses.
2. The program is too expensive and extracts fees that contribute nothing to house quality (this is what buyers really want, quality not warranty).
- The program extracts cash from the builder up front, before work is started. This means the warranty payment is made to the insurer before construction begins. This is great for insurance companies but terrible for builders. When the money is given prematurely to the insurer, they have zero risk, at that time there isn't anything to insure. The insurer has the money for about a year before it starts to incur risk in terms of maybe having to pay out on a claim. Of course, the insurer gets to invest this money while enjoying a large influx of funds and no risk of having to pay out. In what other industry is insurance paid so far in advance of the policy being needed?
- The security deposit reduces the viability of the builder. Some insurers require $20k up front from the builder, plus the enrolment fee, plus a fee for each home to insure. During my first project I was out of pocket $25k for warranty expenses, before I did any work. I would later be in desperate need of those funds to deliver a quality product to the buyers. Not having that money meant borrowing it elsewhere at a high cost (or cutting corners to finish the job).
- If a buyer had two choices, choice a) buy a high quality durable house with no warranty, or b) buy a junk disposable house with a warranty, who would pick option b? No purchaser ever would pick option b. So isn't a warranty really not needed?
3. All that a warranty does is provide a false sense of confidence to the buyer that the product is quality. There is no relationship (unfortunately) between warranty and quality. All new houses have to have a government warranty. All the program does is disguise and shelter the lowest quality builder from buyers.
- A warranty is essentially a verbal promise to fix stuff, from a builder to a buyer, for a certain period. All the paperwork produced to describe this in detail means nothing if the builder doesn't intend to fix a problem. There is no way to actually compel someone to fix something. A better option would be to avoid buying a house if the verbal promise of a builder is meaningless. If the buyer feels the builder isn't trustworthy, then under no circumstance should that person purchase that house. If the buyer has so little confidence in the builder, that person should continue looking until such time that they are confident in the product they are buying.
4. Builders can offer their own warranty and don't need a government collecting fees and an industry of insurers making money off the warranty. Builders are not allowed to use the warranty, they still have to fix the problems. The insurer would immediately demand a builder fix the problem if a home buyer filed a claim.
- A builder can offer a warranty at no upfront cost. There would only be cost to the builder if he had to fix something. All the program fees would be avoided. The program fees are just profit to an industry that doesn't fix houses.
- Each dollar paid to the industry and government to service insurance that isn't actually a warranty means if there actually is a problem, the builder has less money to fix it. The builder has to pay twice, first for an insurance policy that can't be used, and second to fix the problem.
- If the builder didnt need to make security deposit to enrol in the program, he would have a lot more money to actually fix stuff that breaks.
- I already have an insurance policy that covers some types of problems. So now I have two insurance payments, one of which I am pretty sure I can never collect on. In order to have a buyer use the warranty program, I would have to be bankrupt and leave the industry permanently.
So there you have a lot of reasons that I have decided the warranty program is a farce. The warranty costs a lot of money, doesn't work the way it should, can't be used except in a circumstance that is so terrible that the person who bought the house should have known better, and provides a false sense of security that all new houses are quality. Which we know isn't true. The warranty program is a collective delusion that all participants adopt, but only the builders pay for. The warranty program makes houses cost more, and be built worse, and who really wants that?