6 Home Warranty Tips
When working with clients we are often asked about home warranties. They are one of the most frequent add-ons to a purchase and sale contract. This week we will explore the features, benefits and possible challenges of home warranties. The biggest benefit of having a home warranty is the peace of mind that you are covered if something breaks. Depending on the warranty product you have and the item that breaks, you could find out that short-term peace of mind was the only thing you got for your money.
- You may already be covered.
If the appliance is new, the manufacturer probably offers a warranty automatically with the purchase. If you bought the item with a credit card the manufacturer warranty may be automatically extended or supplemented. American Express, some Citi Bank cards, and others offer these extensions as part of your cardholder agreement.
2. Cost
You can choose from several warranty products at varying prices. You can get individual appliance warranties, major systems warranties, whole home coverage including plumbing and electrical, or some variation of these from most home warranty providers. The more extensive or better the coverage, the higher the price. Products start at around $200 and go up to $800 or more. At some point the cost becomes prohibitive.
- Excluded items may not be obvious.
The majority complaints about home warranties are based on customers not being clear about what is covered and the extent of the coverage. Be sure to carefully read the terms and conditions before you purchase a product. Some plans cover the appliance, a refrigerator for example, but excludes some features like ice makers. Or it may cover a water heater but not the water heater’s tank. Often the most likely part to fail or the most expensive part of the appliance is not covered, which runs contrary to your reason for having the coverage. Power surges, lack of routine maintenance, “improper” installation, or things like breaking while in self-cleaning mode are other reasons an appliance would not be covered. The company would go out of business if the warranty was as good as it sounds at first blush, they must limit items to be profitable.
- Replace might be worse than repair.
If an item is deemed too expensive to repair, the warranty company may choose to replace the item. This sounds great until you realize that they often offer only a depreciated value for your appliance. To get a new one, you’ll likely have to come out of pocket for the difference.
- Total pay-out is generally capped.
Limits on individual appliances often apply. A typical limit is $1,000-$2,000 total for an individual item (including accessing, diagnosing, repairing and replacing) or $10,000 for the entire home over a 1-year coverage period. We had a particularly faulty dryer heating element, after the 3rd repair in as many months the company informed us that they would not cover any further repairs. Because we had already exhausted our payout limit on that appliance, the replacement was totally on us.
- You might be able to just self-insure.
If you take the money you were thinking about spending on a warranty and simply put it in a separate savings account that you do not touch, you could use that as an emergency repair fund. The best part of this idea is that the money grows over time if you don’t use it. Rather than expiring at the end of the year term, the money is still there and has grown if the account is interest bearing. Though it won’t have grown much at today’s interest rates. If you keep doing this each year, it does not take very long to build up a substantial safety net.
Often, we have buyers ask about getting a home warranty included with their home purchase. We would never tell someone not to buy one but do generally have some reservations about including it in a contract. We definitely suggest that they spend some time reviewing the terms at very least. When we are representing the seller and we get a contract that includes a concession for a warranty, it often has the effect of making that offer less desirable. Recently the price difference between two offers was negated by the inclusion of a home warranty request. The lower offer ended up being a better deal by $25 because it did not include a warranty request. They are not all bad, but they are not a golden ticket either.
