In this very competitive real estate market where buyers are waiving their home inspections or may not be able to negotiate repairs with a seller, some buyers and sellers think that a home warranty can bridge this crevasse. Home warranties have their place and can be very useful however they are not the miracle fix.
Have you read a home warranty policy lately? I did and here’s what I found.
VIDEO: Is the Home Warranty the Miracle Patch in this Seller’s Market?
What is a Home Warranty?
A home warranty covers certain items and systems from defects in materials and workmanship. A typical one-year home warranty policy costs about $400 to $500 and covers specific items like appliances, the HVAC system, covers plumbing issues, and the like.
Home warranties are not the same thing as a home insurance policy, which covers homeowners from sudden and accidental damage from fire or flooding.
When one of these components breaks down, the homeowner contacts the home warranty company. The home warranty company sends out a local contractor to fix or replace the item. The home warranty company either charges a deductible or a call charge for this contractor to come out. It may be about $75 to $100.
You may be thinking this sounds like a great deal and how could this not bridge the gap between a buyer and a seller? The problem is the limitation of what a home warranty can actually do.
Limitations of a Home Warranty
The home warranty policy has very specific language about what it covers and what it does not. For example, the policy may cover the clearing of a clogged drain but it won’t cover the costs to locate or access the cleanouts. The policy may cover the water heater but not the expansion tank.
The common complaints people have with their home warranty boil down to their high expectations of how the policy works. This is not a policy that will fix or replace anything for any reason for a $100 service call.
Exclusions
What is NOT covered under the home warranty is more important than what IS covered. Although the HVAC systems may be covered, not all of the components of the system will be covered.
Claim Gaps
If the covered item, like the furnace, cannot be repaired and needs to be replaced, the home warranty company has caps on how much they will offer to replace the furnace. If a new furnace costs $5,000 to replace, the warranty company may only pay up to $2,000. It is certainly better to pay $3,000 for a new furnace than $5,000 but again, many homeowners would expect it 100% of the claim to be covered.
Preexisting Conditions
For home buyers, this is one paragraph they really need to understand. Typically how home warranties come into play during a real estate transaction is the buyer will conduct a home inspection, the seller will not agree to any repairs, but the buyer still wants to buy the home. The buyer may erroneously believe that a home warranty will cover all their repair requests. Most home warranties will not cover pre-existing conditions.
Accidents and Misuse
Home warranty companies usually are not going to be responsible for accidents, fire, freezing, damage from storms, earthquakes, and the like. That type of incident would fall more under the home insurance policy.
The home warranty most likely will not cover malfunctioning items due to misuse or abuse of the item. If the item was not maintained or serviced properly, that could get the claim denied, too.
The Bottom Line
Home warranties are not bad; buyers and sellers just have lofty expectations of what they can do.
Home warranties do eliminate the need to find a contractor when something goes wrong however this also eliminates the option to choose a contractor, how the item is to be repaired, and if the item needs to be replaced, the home warranty company decides the make, model and brand of replacement.
The trade-off is the work and/or replacement can be a lower out-of-pocket expense.
A home warranty is not the solution in our competitive real estate market when negotiating repairs. What is more important during the home buying process is understanding the condition of the home through home inspections and having a financial plan to build an emergency fund for unexpected repairs.