When our son and daughter-in-law bought their very first home, they probably would have passed up the home they bought if the Seller had not offered a home warranty. The furnace on this post World War II home was on its last legs, and they did not have enough money to buy a new one.
With the peace of mind that for one full year they didn’t have to worry about such a huge expense, they bought the home. And sure enough, just ten months later that old furnace coughed out its last bit of heat and died. The newlyweds got a brand new furnace for the price of a small service fee (deductible). And the added benefit: when they sold the home just four years later they were able to market the home with a “four year young” furnace and made a nice profit.
The Home Warranty Defined
In a nutshell, the home warranty is a mechanical warranty that complements your homeowner’s insurance. While each warranty company offers different levels of coverage, and their prices vary somewhat, they share a lot of similarities:
Many companies cover such items for the buyer as:
- Air conditioning and heat pump
- Heating system and ductwork
- Steam or hot water heat systems
- Geothermal heat pump
- Plumbing systems
- Plumbing pipe leaks
- Toilet assembly parts
- Drain line stoppages (including roots)
- Permanently installed sump pump
- Built-in bathtub whirlpool motor and pump
- Water heater(s)
- Garage door opener(s)
- Range, oven, refrigerator, and cooktop
- Garbage disposal
- Trash compactor
- Built-in microwave oven
- Instant hot water dispenser
- Electrical wiring
- Fuse panels and circuit breaker panels
- Electrical switches and receptacles
- Fire and burglar alarms
- Doorbell system
- Central vacuum system
- Attic, ceiling, and exhaust fans
- Roof leak repair
- Washer and dryer
The items listed above are typically covered by the warranty companies on behalf of the Buyers. The Sellers can also utilize the warranty during the listing period. Most warranty companies cover the home for all the items listed above with the exception of the heating and air, unless the Seller pays for an “enhancement” package. (If the Seller wishes to pay for HVAC coverage, it is important to do that right away, simultaneously with the home’s listing contract.)
Do Buyers Really Use The Warranty?
In 2011, the warranty industry saved homeowners over 350 million dollars in repair costs. And in 2012, claims were up 25% due to temperatures across America stuck in the triple digits for weeks. I interviewed a home warranty representative in the Louisville, Kentucky area, with 2-10 Home Buyers Warranty, and our the local representative cited some interesting statistics:
- A policy holder averages two claims per year, and most homes over 13 years old are 68% more likely to experience at least one major mechanical breakdown each year.
- A home system or appliance repair can range from $65 to $2,000. A replacement averages $1,085.
- Homeowners spend an average of $900 each year to repair home systems and appliances. By contrast, a home warranty costs between $350 and $500.
In today’s real estate world, it really is valuable peace of mind for buyers to know that for one full year they do not have to worry about how to pay for unexpected repair or replacements. And since lenders are requiring more down payment money, buyers can use their savings toward down payment and closing costs.
What The Home Warranty Doesn’t Cover
It is important to know that if the home warranty covers the replacement of a leaky toilet, it will not cover the secondary damage that occurred as a result of a leaky toilet, such as a damage to the bathroom floor. You would contact your homeowner’s insurance company to submit a claim for damage to your floor.
What isn’t covered is just as important to know as what IS covered, so be sure to read the fine print: Look over the limits of coverage thoroughly. The cost of coverage can increase based on the square footage of your home. Home warranties do not cover routine maintenance.
If it is discovered, for instance, that the garbage disposal was never wired properly in the first place, the warranty company may deny your claim as an “improper installation.” This type of thing should have come to light well before closing as part of a professional home inspection. In this case, you would ask the Seller to take care of this as part of the repair negotiations.
Who Do You Call When You Need To File A Claim?
Your Realtor will make sure you are given a copy of the home warranty that either the Seller paid for as part of the real estate sales contract or that you opted to purchase. The warranty contract will have a confirmation number and a number to call if you need to use the warranty for a repair or replacement. Make sure to call that number first. Do NOT call your service person directly. If your favorite electrician or plumber is not on the warranty company’s preferred list, they likely will not pay for the service. Each home warranty company has a long list of specialists they work with. The proper protocol is to let the home warranty company make the dispatch call to the service provider. You will be responsible for paying the “service fee” or “deductible”, which can vary from about $60.00 to $100.00.
Does The Warranty Cover Pre Existing Conditions?
Since all warranty companies are not created equal, this is an important question to get answered, and this is where it really pays to compare companies. Many companies will offer coverage for “unknown” pre existing conditions. Now obviously if flames are shooting out of your furnace, or your water heater is sitting in a pool of water at the time your listing contract begins, those items will not be covered. But there are many things that often are a surprise to the Seller and often not discovered until a home inspection takes place. All the more reason it is important to ask a lot of questions and read the contract carefully.
How Does A Home Warranty Benefit The Seller?
The main benefit is obvious: It helps sell the house. According to the local home warranty representative, homes with warranties sell 3% closer to asking price, and sell 3-4 weeks more quickly. It helps you as the Seller to compete with newer homes in the same price bracket and area. And since the warranty covers your home during the listing period (with exceptions such as the heating system and/or air conditioning system), there should be less repair requests from the Buyers.
Another great benefit to the Seller is that if (or more likely when) something breaks after closing, the Buyers are not calling them in the middle of the night. The Buyers are calling that 1-800-COME-AND-FIX-ME-NOW number instead.
So, back to the original question: Is the home warranty a good idea or a bad deal, I would have to say that it is a very good idea. Even if the Seller doesn’t offer to pay for it as part of the sales contract negotiations, I would still pay for it out of pocket as the Buyer. Even if the warranty only covered you against HVAC, electrical, and plumbing issues, the price of the contract is a small price to pay against the “what ifs” of life.