One of the biggest fears for many homebuyers is that there is something wrong with the home and it’s waiting until after closing and the move-in to rear its ugly head. It is this fear that brought about the birth of the home inspection industry in the early 1970’s. Today’s professional home inspector performs a thorough investigation of a home’s components and systems that are visible to the naked eye. Some go further with infrared technology to see behind the walls using a thermal imaging camera. Even the best home inspector, however, may miss something, which is why there is so much interest in home warranties.
The idea behind a home warranty is to provide financial protection for homeowners faced with the failure of major mechanical systems, such as the home’s heating and air conditioning. Home warranties provide, most of all, peace of mind.
Home warranties aren’t insurance
One would think that with all the media attention surrounding health insurance, the average American would be well-versed on the subject. Insurance, however, be it health or homeowner’s, is a complicated subject and therefore confusing to many. In a nutshell, your homeowner’s insurance policy covers the home’s structure and certain personal belongings from financial loss due to theft, fire and other calamities. If your water heater is stolen, your homeowner’s policy should cover it. If it breaks down, that’s on you.
Home warranties, by the way, aren’t actually warranties either – at least according to the federal government’s definition: A warranty comes with the purchase of a product and the cost is included in the purchase price.
Since the home warranty is purchased separately from the home and it costs an additional fee, it is best described as a service contract.
Home warranty companies offer a variety of plans and typically the more you pay, the more your plan will cover. Most of the basic warranties – known as “first tier” and “second tier” plans – cover the homes major systems, such as HVAC (heating, ventilation and air conditioning), plumbing (some plans cover outdoor plumbing, such as a sprinkler system) and electrical (typically covered in tier one and tier two plans). Major appliances, including the refrigerator, garbage disposer, range, water heater and washer and dryer are also covered.
The key here in the home buying conversation is that all systems need to be functioning at the time of closing. I had a home under contract once that had an HVAC with a leak in the air compressor. My broker at the time told me to, in her words, “have them put some freon in it, slap a warranty on it and get it to closing!?!” That’s some bad advice. Home warranty companies are not stupid. As soon as they send out their service provider to look the unit over, they’d find a “month after closing when the coolant has leaked back out,” that it was in disrepair and they would call that issue an exclusion and deny coverage because of a pre-existing condition. Needless to say, I did not follow her direction.
This is where some warranty companies get a bad review because they are deemed the villain. In reality, it was the agent (or broker) that may have said to “slap a warranty on it.” This is why my job is to make sure we have that “second tier” plan included with sale for buyer’s I am representing and that if it truly is broke, we make the seller fix it before closing!
What’s not covered under a home warranty
Anything that isn’t covered under the home warranty is known as an “exclusion,” and you’ll find these vary between companies.
Most home warranty contracts won’t cover breakdowns due to normal wear and tear. They also exclude anything damaged due to deferred maintenance, insect or vermin damage and acts of God. Structural problems, such as a leaky roof and cracks in the wall are typically not covered, although you may find a company willing to cover these for an additional cost.
You can buy optional coverage
Speaking of additional cost, home warranty companies offer optional coverage at additional cost. This includes coverage for a septic system, well, pool, spa and central vacuum system.
Are home warranties worth the cost?
The average cost of a home warranty, nationwide, is $969, although many Americans spend as little as $300-$400 and as much as $1,702, according to HomeAdvisor.com. In Georgia, I see a home warranties with “second tier” coverage cost $575-$615 for a warranty that has enough additional coverage to actually be worth a homeowner’s while to maintain. In the event a covered component fails, the warranty provider will send a technician to your home to investigate the problem. You will be required to pay a $75-$100 service fee each time a technician visits your home depending on your warranty and how it was set up at the time of purchase. The lower the service fee, the higher the annual ‘premium’ cost.
Whether or not home warranties are worth the cost depends on whom you ask. Many real estate professionals feel that purchasing one during the first year of homeownership, when folks are strapped for cash, is a wise move. Some consumer organizations, however, feel otherwise.
In fact, Consumer Reports cautions that “We recommend avoiding service contracts . . . far too often, warranty claims are denied because the company says the problem was pre-existing. Or, the claim is denied because the consumer can’t prove that a broken item was properly maintained.”
Once again, I think this is not necessarily good advice. Remember, it’s the buyers’ agent that normally orders the home warranty that’s added to the sale at closing. If the contract was placed on a house with pre-existing conditions anyway, sure they will deny those claims. Yet, if the buyer’s agent is doing their job and you are working with an agent who is knowledgeable about how warranties work, understands what repairs are needed, and they are also a good negotiator to get those repairs handled prior to closing by the seller, then this lessens that risk of a denied claim being under a pre-existing condition.
Let’s be honest and candid here. I see a disturbing trend today where most buyer’s agents don’t even show up for their own buyer home inspections anymore. How are they therefore to know and understand what real issues the home has? If they don’t have the time in their schedule to attend a 3 hour home inspection, do they read the 75-85 page inspection report cover to cover? I seriously doubt it. So if your buyer’s agent is not showing up for your inspection, doesn’t even have a conversation with the home inspector about the condition of the home, how can they give you the best advice to protect you on repairs and order a warranty for you that will stick when you need it after the closing?
If you decide to purchase a home warranty, or when buying have the seller purchase one for you as part of your contract, check the company’s record with the Better Business Bureau. Then, keep impeccable home maintenance records. This includes your home inspection and any receipts or invoices on repairs made by the previous owner as part of your contract on the home. The home warranty company may request to view your records as part of your claim if your claim. This is especially true if your claim is filed within the first 90 days of your closing.
One more thing. Make sure to ask your buyer’s agent if they show up for the home inspection. If they say no, then I might find someone who does.