Home Warranties – Home Buyer Beware

A concept that has become vogue in residential real estate in the last several years is home warranties. The seller of a property you are considering may offer a home warranty on their house to sweeten the deal. But should you accept a home warranty in lieu of repairs of inspection items?

The basic way a home warranty works is that you pay a premium of $250-600 (or in this case, the seller pays it). Then, if something breaks in your new house, you call the warranty company and they contact a local service provider. For a service fee (you pay this) that ranges from $25-75, the service provider comes out and fixes what is broken. IF it isn’t an exception. This can be a big “if.” The home warranty I have on my house didn’t cover the refrigerator, certain parts of the air conditioning and heating system (usually the expensive parts), and even hauling off the broken parts once they repaired the item. Guess what appliance broke first. The refrigerator. Haha! It was an extra $150 to upgrade to the premium service that covered the refrigerator.

Now, I should mention that the home warranty I have has covered its cost. On two different occasions, I had appliances break, and the company came out and made repairs that would have cost over $300 each. If you are considering a warranty, make sure you read the entire agreement and determine what the exclusions are before you buy it. Some will have exclusions for preexisting conditions or for deferred maintenance. Refer to the micro-print for such exclusions. Also, there are several companies that have been around for many years. Some have just jumped on the bandwagon when it became an exceedingly profitable business to be in. These companies may have no track record. There are several websites that offer home warranty reviews. I suggest researching customer reviews before selecting one.

The concerning trend with home warranties is that sellers are offering them to sweeten the deal to buyers. Real estate agents seem to be driving this emerging trend. What you need to be aware of as the buyer, however, is that warranty companies pay real estate agents a commission for each policy that they sell. So of course they will recommend them. Buyers agents may even suggest asking for them in the initial offer to purchase. Louisiana now has a home warranty clause in the standard residential agreement to purchase.

The problem from a negotiating standpoint is this: Once you are getting a home warranty as part of the contract, it can make the seller less willing to repair items the inspection uncovers. Their thinking is that they are offering you this home warranty so why do they need to fix the leak in the air conditioning unit. This becomes costly for you because the seller might have otherwise felt compelled to fix these items or reduce the purchase price of the home to compensate you for making the repairs yourself. Then, when it comes time to fix these items, your warranty may have expired or may exclude the item.

If you decide to ask for or accept a home warranty, make sure you are clear what exclusions the provider of the warranty policy offers. I recommend not asking for a home warranty and buying it yourself after the sale closes. Most companies are still ecstatic to provide it. I certainly caution you against accepting a home warranty in lieu of the seller making repairs to satisfy the inspection contingency. A savvy negotiator can use the inspection report to save thousands of dollars when buying a home and a home warranty can sabotage this valuable negotiating tool.