NEW YORK (Zillow.com) — Home warranties have been around for decades but have just started to be widely purchased in the past ten years. They are often used in sales transactions as a kind of “insurance policy” that the seller can provide for the buyer. The theory is that if something goes wrong with a covered item — appliance, electrical, plumbing, etc. — the buyer will call upon the insurance policy instead of blaming the seller. While this sounds great in theory, the general policies have some significant limitations and issues.
For example, home warranty companies could have customer service issues that should cause a buyer some concern. However, to be fair, much of this comes from a common misunderstanding about what is actually covered. This happens because few people who receive the policies actually read them to find out what is not covered – like pre-existing conditions, or certain appliances in the basic policy. Of course, some complaints result from companies refusing to cover certain items and hope that people will give up trying, but it should be noted that some of these claims are just plain dubious.
Which leads to the big question: Are home warranties worth the $350 – $500 per year?
The answer is, it depends.
There are plenty of people who make claims, get paid out, and are happy with their service. But, there seems to be a lot of people who are not very satisfied.
Because the most common way for someone to be introduced to a home warranty policy is typically at the purchase of a property, let’s address that first.
Seller’s Side – If you’re selling your home, you might believe that offering a warranty is a good marketing tool to get the property sold. This is the typical pitch from an insurance company. And if something breaks after the sale, the new owner can make a claim on the policy. It’s estimated that about 80% or more of residential sales come with a home warranty policy. And if the seller feels more comfortable with this “insurance,” then it’s a small price to pay for that piece of mind.
Buyer’s side – If you’re buying a home and the seller is throwing a home warranty policy in, you have nothing to lose. Just don’t count 100% on making a successful claim on the policy.
For one thing, many buyers forget they even have the policy! So keep a note on your refrigerator to remind you. Additionally, after an unsuccessful claim, some people find it easier to just call a local repairman. That’s unfortunate, but insurance companies do not make money by easily paying out claims. And each year they learn, and their policies further restrict against the expensive issues they’ve had to pay out upon in the prior years.
Buyers also need to realize that with older appliances, things are going to break and cost money to fix. It is best to try to get some money as a closing credit in the sales contract, to compensate for older items; or reflect this issue in the original offering price.
Seller Won’t Pay, or First-Year Policy Expires or Existing Homeowner – Before you decide to buy, make sure to fully understand what is covered and what is not covered by the policy. And if you’ve had good luck with a company in the past, go for it. If you have no experience, consider this: what are the chances that you will have a loss that is actually covered, and that it will be more expensive than the annual policy cost plus the service visit fee? On that note, it might just make sense to differentiate between newer and older homes.
New Homes – When you buy a new (or newer) home, many of the existing warranties may still be in place. These could cover several of the appliances, so review them! And since the appliances are new, they should have fewer issues. As to electrical or plumbing items, they are pretty rare in newer houses and there may be a developer warranty anyway, depending on the state. Overall, you might be better off saving your money and just paying claims, when/if they arise, rather than paying for a home warranty.
Older Homes – Older homes have a higher chance of something going wrong that is not under a warranty. But if there are new appliances or updated systems, you may not have issues after all. Even if they need replacement, many policies will only pay the depreciated value on older appliances. Read the full policy carefully if you plan to purchase a home warranty to make sure you know exactly what is covered.
Overall, it seems the restrictions on claims, exclusions, and customer service issues tilt somewhat against paying $350 – $500 per year for a policy that you may not actually use.
Now what would help the industry is if the companies were able to better convey upfront what is and isn’t covered – so there are less misunderstandings. Regardless, those are a few items to consider. Now you can make you own decision, based on your house and appliance ages, and your tolerance for the potential that you may have to cover an entire loss.
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a guest blogger on Zillow Blog, the author of “Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate”, and loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.
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