keeping real estate simple

When I am not working, one thing I like to do is golf. Unfortunately, the time to do so is few and far between with work and family responsibilities. So it is extra nice when I am able to get out and hit that little white ball around a little bit. The other day, I was able to kick out of work early and hit the course with a friend. Not long into the round, he said to me, “You are in real estate, what is it with these home warranties every buyer is asking for the seller to provide? Are they a scam?”

He went on to explain that a co-worker of his had recently bought a house for the first time, and had one of these home warranties. Unfortunately, not long after moving into his house issues with appliances and HVAC started to come up. And from the sounds of it, this particular home warranty wasn’t worth the paper it was written on. The company he is covered with continue to deny coverage for one reason or another. Or when they do fix something, it is done incorrectly, etc. So he (and the co-worker) are understandably skeptical as to why they are a thing in real estate if they are as worthless as they seem to them. Why are they recommended, do the agents get kickbacks on them, or what?

First off, let me be clear that, at least in the state of Missouri, ANY kickbacks from such companies to Realtors is illegal. We get absolutely nothing for signing our buyers up for these coverages. Other states may have different takes on this sort of thing, so you should find out how your state handles it.

So let’s take a look at these home warranties, find out what they are, and whether or not they are something that is necessary in a real estate transaction.

There are many different companies that offer home warranties. Some are local service companies that offer the warranty AND do the work themselves, others are national companies that only offer the warranty and then outsource the actual work to a contracted servicer in your area. Neither is necessarily right or wrong, but my feeling is the companies that do the work tend to be a little easier to work with in my experience. Mostly because I believe that local companies tend to care about their community and the people in it, so will be more customer focused rather than money focused. National companies sometimes don’t see it the same way. But that is just my opinion.

To start, what is a home warranty exactly and what does it cover?

For help with the “what is it,” I will pull a definition from the company that my brokerage has partnered with to provide the warranties for our clients. This is straight from their website. Feel free to get more information at http://www.abmay.com.

What it is:

A home warranty contract, also called a service agreement, provides for the repair or replacement of a home’s mechanical systems and major built-in appliances in the event of a breakdown due to normal wear and tear during the agreement period.

What is it not:

A home warranty is not the same as homeowner’s insurance. In fact, warranties exclude coverage on any damage to the home or its contents.  Furthermore, they are not designed to cover pre-existing conditions or to remedy building code violations.

Primary Benefits:

The primary benefit of a home warranty is the protection afforded to the home owner on a home’s operating systems. Home Warranty Plus is protection beyond the sale.

In short, at least with the home warranty company I am most familiar with, the warranty is protection against issues to the property’s heating and cooling, plumbing, electrical or appliances. It might be different with the company you use, and there are limits and exclusions to be aware of as well. It is best to read your warranty and understand what is and is not covered before you purchase it.

Additionally, you have to understand that the warranty is only as good as the company that is offering it. Some companies will go out of their way to ensure the best customer service experience possible, and well, others do not strive to do that. Just google it and you can find lots of examples of both.

As with anything, do your research on the company before to purchase it or ask the seller to provide it.

If I am going to be honest, I think the disconnect between my friend and his co-worker with the situation he is in, is likely the fault of his Realtor for not setting the correct expectations (which is a huge part of our job.) I believe that in most cases the buyer of a property assumes that the home warranty is going to cover them for any and everything that comes up for little or no money. And then are disappointed when this isn’t the case.

The best way I have heard it explained is this way… the warranty is given to you by a third party that agrees to help cover equipment they didn’t make. From that perspective, it makes sense that this wouldn’t be a full 100% warranty on anything and everything. Right?

So, my job as a Realtor is to make sure that my buyers understand that the warranty they are getting is there to help them in the event that something goes wrong. It is just like health insurance, if your doctor does something like an x-ray for example, it’s usually not free, but you do get some help with the cost of it. Same here in that if your oven stops working, the cost to repair or replace will not be free, but it will be less than it would be if you didn’t have the coverage.

Just like with any other insurance, there is bad with the good. Insurance/warranty companies base their business model on NOT paying out any claims. Otherwise, they wouldn’t be in business. So exclusions and limitation abound in the contracts. Kind of the nasty little truth of the insurance world…

Personally speaking, I have had dealings with both types of home warranty companies I spoke about above. And my feelings on how each has handled my claims admittedly has made me a fan of one, not so much of the other. I have worked with warranty companies that made things super easy, and fixed or replaced an item for little cost to me. Conversely, I have had a company try everything they could to wiggle out of doing what their contract stated. So I have been there. It makes me appreciate the company’s that put the customer first and know that maybe a little less profit now, could mean greater profits over the long haul by making a customer for life.

That said, I do have to offer up that there are plenty of people out there who have maybe had the exact opposite experience as me and have a different opinion on the matter. Since I am not here to tell you which one is best, I will move on.

Back to the question my friend had about why buyers are asking sellers to provide this warranty.

Aside from the obvious reason of it is free if you can get the seller to pay for it, here are my thoughts on why a buyer should ask for it.

Contractually speaking, the only thing a seller is liable to do in the transaction is to disclose any and all material defects of the house (that are known) and to sell you the house as the contract states. Nothing more, nothing less. There are no guarantees listed anywhere in the contract in case something were to happen after the buyer moves in. So for the most part, the contract is very pro-seller in that regard. And we are talking about buying something that is years, decades or even centuries old in some cases; and for a lot of money. So the buyer assumes all of the risk. A real estate transaction certainly lives up to the saying, “Buyer Beware.”  There is no way for that buyer to know that the components inside the house that are used the most frequently, have been used correctly and been taken care of by the previous owner. And unfortunately, a home inspection isn’t always able to tell either. So the buyer does come into buying the house fairly blind as to what issues might be inside.

Given that, I do believe that it is only right that the seller offer the buyer a home warranty that would help in the event that something were to occur in that first year. It is a small price (usually around $500) for the seller to pay to convey to the buyer that they in a sense “stand behind the sale” even though they will have no further dealings with the property. It gives the buyer some warm and fuzzies that if something happens, they will have some coverage. Therefore, I usually advise my seller to pay for one as a show of good faith to the buyer. As well as I would ask for one for my buyers depending on what side of the table I am on.

However, don’t confuse that with thinking that it is a “must” in a transaction. Because I do not think that it should be. There are times in a transaction when offering or asking for one doesn’t make sense. And from the buyer’s perspective, I certainly would not advise them to walk away from a house they love simply because the seller is not willing to offer the warranty to them. If it is that important to have the warranty, you can buy it as well. It doesn’t have to be provided to you by the seller.

In conclusion, I would say that for the most part, a home warranty is worth the money as long as you are with a company that is going to stand behind their promises within that warranty. The best thing to do is before you ask for or purchase warranty, check out the company and read some reviews on how others feel their service is just like you would with anything else you buy. Even if it is “free” to you, doesn’t mean you don’t have some choice into which company you go with.