Home warrantees – boon or boondoggle?

The Home Warranty is a ubiquitous fellow traveler in many home sales, but not all. A home warranty is just what it sounds like – an insurance policy to protect the home buyer against a number of things that could go wrong in the home during the first year of ownership. Policies differ in what they cost and what they cover and they are usually paid for by the seller; however, the buyer may purchase a home warranty, if he does it at or before closing. Things usually covered include failures in major systems like the HVAC or the hot water heater or many plumbing issues.

The reason that not every home sale carries the protection of a home warranty is mainly due to the unevenness of the coverage of policies from the companies in the business and a history of business practices by some of them that have given the whole industry a bad reputation with many buyers. Much of that bad reputation can actually be traced to the home buyer misunderstanding the home warranty policy coverages or how the company’s business practices work when a claim is made.

Way too many people thought that everything was covered under the umbrella term “Home Warranty.” In fact, each policy has a clear list of items that are covered and those that are not, just like an automobile or home owners policy does. Many people just don’t read their policy to see what is covered and then they get mad when they call in with a claim and discover that the item that just failed is not covered. Some home owners also disagree with the standard policy to repair items rather than replace them, unless repairs cannot be made. Most warranty companies have adopted policies that replace older air conditioning units that don’t meet current standards because their repair people cannot get the parts or the Freon to deal with those older units.

The other sticking point with many is the business practice that requires that the home warranty send out the repair person to evaluate the claim. That call is usually charged to the home owner at $85, however, that $85 is refunded if a repair is needed and covered by the policy. If the repair person gets tot eh house and the “failed” hot water heater just has a pilot lite that blew out the homeowner is out that $85. That makes many home owners mad; and since they can’t get mad at themselves, they get mad at the home warranty company. 

  

The companies in the business also shot themselves in the foot in earlier times by poorly handling claims or providing very poor customer service and explanation of coverages. I hear the terms “worthless” all the time when mentioning home warranties; however, that if far from the truth. They can be lifesavers if items that are covered do fail. I have a neighbor across the street who got a whole new furnace less than 4 months after he moved in because his old furnace failed and the home warranty company couldn’t repair it.

So what should you do if you are buying a home and are offered a Home Warranty? I’d say go for it; but, do a little research first on the company that the seller is offering to foot the bill for. It may be better to negotiate with the seller to switch the warranty to a better company, even if you have to kick in a little to make the switch. Here is a link to an excellent article on Home Warranties and the Companies that offer them on the Reviews.com web site. Check it out and remember to read the warranty to make sure that you understand what is covered and how the claim process works. 

I recommend going to Reviews.com for helpful information about many more topics. Check out their site and all of the reviews that they have on-line there.

First time buyers - What is a home warranty and do I need one?

As you look through listings on-line you might notice that some advertise that the home comes with a Home Warranty; and you might wonder, “What is that all about and do I need a warranty on my new home? “

The easiest way to understand this product is to think in terms of other things that you buy in life. Probably the biggest single purchase that most people make, other than a house is their car. If you buy a new car, it comes with a warranty and you expect that. The best warranties say that they cover everything on the car; they are often advertised as bumper-to-bumper warranties. Of course, when you read the fine print you will see that the car makers are careful to exclude all of the items that wear out in normal use – wiper blades, tires, and such. That’s understandable and you are still covered for the larger items – engine, drivetrain and major systems and components. If your car’s air conditioner compressor give out in the first year or two that is usually covered for a repair or replacement.

The same kind of thing applies to home warranties. They all cover the major systems and items in the home, but there’s also fine print that you must understand. The devil, as they say, is in the details. Below is an explanation of home warranties provided to me by Chris Papinaeu. Chris is the account executive for the Real Estate One Home Warranty program that we provide for our customers. The REO Home Warranty is a private branded offering from HMS National Home Warranty, a leading home warranty company.

"Home warranty" is a marketing term held over from the early history of the industry. In fact, a home warranty is not actually a warranty but a service contract. Generally, a home service contract provides service, repair or replacement on a home’s major systems and appliances, usually for a term of one year.

Basic and optional coverage varies from company to company with some regional variances. Home service contracts are specific and do not include everything in your house, and most do not cover home foundations, walls, structure or finish.

Typical systems that are covered include: interior plumbing, heating system, electrical system, water heater, ductwork, dishwasher, oven, range/cooktop, garbage disposal and garage door opener. Heating and air conditioning systems, refrigerators and washer/dryers may be part of a basic contract or may be options. Spa and pool equipment may also be part of optional coverage.

A home service contract should not be considered a replacement for homeowner's insurance. Where homeowner’s insurance protects the consumer from external forces like storms and fire and theft, home service contracts protect consumers from the unanticipated, and sometimes very expensive

cost of normal wear and tear on systems and appliances in the home. In short, the industry’s services "were born out of the need for household repair that was not in the scope of homeowner insurance."

Repair needs for home appliances and service systems are actually quite predictable. According to the National Association of Realtors®, within the next 12 months, there is a 60 percent chance that a key system in your home, such as the furnace, air conditioner or major appliance will fail, and the cost of the repair will average $900. Sometimes, it can be considerably more than that. For example, according to analysts, HVAC systems "are often some of the most expensive to repair and replace for homeowners and make up one of the primary draws for homeowners purchasing home warranty coverage."

Home warranties

A home warranty is an insurance policy that covers the repairs of some of the major systems and appliances in the home, usually for the first year that you own the home. Even newer homes can have problems with plumbing, or the heating and cooling system or some other system. Many of those problems may not be covered by the builders warranty or the appliance warranty, so even with a new-build, getting a home warranty may be a good thing.

The way they work is that you call the company that has your policy whenever anything that is covered goes wrong and they handle sending out a service/repair technician to look at the problem. There is an initial deductible on all of these policies of between $50-100. That deductible covers the initial service call, but is normally returned if the service person ends up diagnosing a problem that is covered under the policy.

The normal policy of these companies it to try to repair the system or appliance; however, if repair parts are not available they will replace the item with a similar unit. In the case of units that have new federally mandated standards, like the new coolant requirements on air conditioning units, there may be no alternative than to replace, rather than repair. Some home warranties cover this “upgrade” to the current standards and some don’t.

For service oriented work, like unstopping plugged up plumbing; different companies have different policies about what is covered; such as if the problem turns out to be something like tree roots in the sewer line. These policies don’t cover things like a roof leak caused by ice damming (that should be covered under your homeowner’s insurance policy); however, they do have a “limited coverage” for normal roof leaks due to normal wear and tear. You really need to read the policies closely to understand what is covered and what is not.

As with all insurance policies there are advocates and detractors for these policies. The detractors seem to be the same people who have trouble with anything that asks them to follow a set of rules. They claim that having to use the companies’ assigned repairmen is too restrictive. In some cases, that may be the case and these policies don’t cover certain areas because they just don’t have the contractors in place to cover them.

The insurance companies also don’t cover pre-existing conditions and may ask you to prove that the system was in good working order prior to closing (a home inspection report to that affect is usually enough proof). Advocates say that having the peace of mind that you aren’t going to get hit with a major bill of your heater or hot water tank goes out is worth the effort to use the company repairmen. After all, few of us have a relative or a friend in all of the building trades that we might need to get home repairs done, especially in an emergency.

The company that we tend to use is First American, which has a fairly inclusive policy, covering most of the major stuff that can go wrong in a house. All of these policies have extra things that you can get covered, for more money, of course; including swimming pools, well pumps and other things not covered in the “standard” policy. As with all insurance policies, by almost any company in the business, there are lots of exclusions and fine print, so the buyer is advised to really read the policy before calling for repairs.

While these policies are set up to provide limited coverage to the sellers during the listing period, I normally advise sellers to wait until the buyer asks for a policy. Having a home protection warranty doesn’t seem to be a major selling point, and throwing one in as part of the negotiations is a nice little kicker to have in reserve. The cost is fairly nominal at about $400, which the seller pays at closing. On balance, I think these policies are a good thing for buyers and I always advise my buyer clients to ask for them. In the overall scheme of things they are relatively inexpensive; so, if the home seller refuses to buy one the buyer might be well advised to go ahead and buy it him/herself.