Home Warranties, you’ve probably seen them advertised on television. But do you really need them or are they a waste of money? In this article we look at who should have a home warranty and who may not need them. We’ll also look what a home warranties cover, or don’t cover, as well as their costs.
The rise in marketing of home warranties
For the longest time, home warranties were primarily sold to home buyers. Recently, home warranty companies have ramped up their marketing to existing home owners and sellers. Home warranties have become big business. According to a recent report, the home warranty industry is expected to grow 7% annually for the next several years.
And they’re using some bold advertising statements to influence potential customers. For instance, American Home Shield, a large provider of home warranties, claims “Homes with a home protection plan had an average sales price of $254,682; homes without a warranty had an average sales price of $252,368”. Unfortunately, there is no way of knowing if inclusion of the home warranty directly influenced the sale price of the home, or was just an incidental.
But do you really need a home warranty?
When you do and don’t need a home warranty
If you are buying a home, you have limited knowledge of potential problems with the home. Even if you obtained a home inspection, it’s impossible for the inspector to foresee all of the potential problems. In order to protect their clients, many real estate agents request a home warranty as part of the purchase offer.
When buying an older home
This is especially true of older homes. Peter Evering of Utopia Property Management notes, “Older homes often have aging systems and appliances that are more prone to breakdowns, and the expenses for repairing or replacing them can add up quickly.”
There can be unanticipated problems, even if the home looks perfect. Tracy Taylor, a Realtor with Your Property Connection in Rocklin, CA recommends a home warranty with every older home purchase. Her client purchased a home that had been recently updated and looked beautiful. However, she says, “Several months later, there was a period of heavy rains, and the sump pump in the basement failed.” Taylor continues, “The warranty company sent a service technician and replaced the failed pump for only the cost of a $75 service call.”
Home buyers with limited repair funds
There’s another reason why home buyers should consider a home warranty. Most buyers, have spent a significant amount of their savings toward the purchase of their home. Taylor says, “Recent home owners may have very little savings left to cover items that break.” This is where home warranties can be a life saver. Evering submits, “When a covered system or appliance in your home experiences a breakdown due to normal wear and tear, you can contact the warranty company and file a claim”. The warranty company, continues Evering, “will then send a service technician from their network of approved vendors to assess and address the issue”.
Do I need a home warranty for a new construction home?
However, a home warranty has little value for newly built homes. Newly constructed homes typically come with a 10 year statutory warranty against defects. Additionally, any new appliances will probably have a one year manufacturer’s warranty. The Federal Trade Commissions advises buyers against purchasing insurance that may duplicate what they already have in their home. Buyers should be cautious of companies or agents trying to sell them a home warranty for a newly constructed home.
Home warranties for renovated homes
For newly remodeled homes, home warranties may also be redundant. Mitchell David of Beach Life Premier Team, a real estate brokerage in Maryland and Delaware, observes that remodeled homes may not need a home warranty. David notes, “Fixer-uppers often have appliances switched out or repaired by the seller”. This might include new appliances, including new kitchens and HVAC systems. These upgrades make a home “warranty redundant for homeowners”, says David.
While a home warranty may be redundant in these properties, many home renovators prefer adding a home warranty when selling their product. This is especially true if the re-habber has not replaced all of the major systems. Additionally, even though a contractor may have checked the home thoroughly for needed repairs, there’s no long term warranty like there is for new construction. If there’s a problem down the road, the seller can refer the buyer to the warranty company.
Costs and coverage for home warranty
How much does a home warranty cost?
Home warranty costs range from $400 to $1,000 depending upon the items covered by the warranty. The cheapest plans, as you would expect provide the most limited coverage. For example, First American Home Warranty‘s cheapest plan cost $440 a year. However this plan is very limited, covering little more than the kitchen and laundry appliances.
Excluded items
Typically excluded from the cheaper plans are
- electrical systems
- plumbing issues
- air conditioners
- water heaters
- roll up garage doors
- septic systems
- and roof leaks.
Coverage for these items can however, often be added to the warranty package, but can add significantly to the premium. For instance, Old Republic’s Platinum home warranty package increases the premium from $395 to $825 per year for the higher coverage. Furthermore, even after paying the additional premium, some items like septic are only covered as additional add ons. Other items that may only be covered if purchased as an add on include pool/spa equipment, water fountains, outdoor kitchens, slab leaks, and water filtration systems.
Preexisting conditions, lack of maintenance and other exclusions
There are some things your warranty simply won’t cover, even after paying for the additional options. Zev Freidus, is the owner of ZFC Real Estate in Florida. Freidus states, “Home warranties typically do not cover pre-existing conditions or items that were not maintained properly”. He continues, “They also may not cover cosmetic damages or appliances that are outside of the manufacturer’s warranty period.”
Additionally, most home warranties will not cover damage caused by the failure of items insured by the policy. For instance, your policy may cover replacement of your hot water heater. However, if the hot water heater leaks and destroys your hard wood floor, don’t call your warranty company. Instead, you will need to call your homeowners insurance company.
It shouldn’t need to be said, but it’s critical for home warranty buyers to read the terms of the warranty before purchasing. Evering suggests “It’s advisable to vet at least three providers”. Take the time to compare terms, costs and coverage says Evering, by doing so “you can determine which company provides the most comprehensive protection at a reasonable price.”
Important to include as part of escrow
Policy terms are different if you are the buyer, the seller, or the current owner. For example, Old Republic limits the maximum coverage for duct work and air transfer systems to $500 for sellers, and $1,000 for buyers. (See their Coverage plan limits). If you purchase the home warranty during escrow, your policy will begin when you take ownership if you are the buyer. However, if you purchase after escrow, your policy won’t take effect for 30 days after receipt of your premium payment. If you have a problem and then decide to buy a policy, it’s too late to cover the problem.
Benefits of warranty for the seller
As the seller, if you are providing a home warranty, it may help you to include as part of escrow too. First, some policies provide coverage if you are the seller. An additional benefit, warranties add a degree of liability protection for yourself after the sale. In some cases, it may also allow you to sell your home for slightly more. As noted at the beginning, American Home Shield claims that home being sold with home warranties sell for more.
How long do I need to maintain a home warranty?
This is partly a matter of personal preference. However, if you’re spending close to $1,000 per year for premium warranty coverage, it might be prudent to reconsider. After just three years of putting your premium in a savings account, you could have a healthy emergency fund for repairs. You could potentially cover the cost of repairing, or even replacing appliances that fail. Even if you had to replace a big ticket item like your HVAC condenser or furnace, with a little shopping around, you could replace them for around $5,000. The one caveat of course is if multiple systems fail, you may only be partially ahead.
Conclusion
A home warranty can provide peace of mind to buyers and sellers. But they are especially important for buyers purchasing an existing or older home. New home construction typically will come with a 10 year warranty, so purchasing a warranty is unnecessary. When buying your home, it’s important to include the warranty as part of escrow, so that your coverage begins the day you take ownership. Additionally, sellers may find value in providing a home warranty. It not only gives buyers peace of mind, it may possibly increase the sales price. How long you keep paying for a home warranty is a matter of preference and ability to save. Homeowners who have owned their home a few years, could consider saving their premium for future repairs.