Real Estate Investing

Home Warranties in Real Estate

May 28, 2024

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A Guide To Home Warranties

If you’re buying or selling a home, you may have heard about home warranties. These handy plans can provide peace of mind by covering major appliances and systems in your home. 

But how do they really work, and are they worth it? In this article, we’ll explore the ins and outs of home warranties in real estate, helping you make an informed decision for your property needs. 

What are Home Warranties? 

What is a home warranty and what does it cover?  

When you purchase a home, it may be beneficial to purchase a home warranty. Home warranties, sometimes called residential service contracts, are contracts between a homeowner and a warranty company that offer discounted repairs and replacements for major home appliances.  

A home warranty shouldn’t be confused with homeowners insurance or landlord insurance. These types of insurance cover major types of damage that alter or impact the entire structure of the home: Think floods, fires, or major theft. Homeowner’s insurance policies would not cover appliance repairs. 

Home warranty companies typically require a yearly fee plus a small service charge whenever you utilize the home warranty company to complete a repair. The small service charge often works like a deductible. If the repair is less than the service fee, the homeowner will typically only pay the lesser amount. 

Purpose of Home Warranty Coverage 

The main purpose of home warranties is to provide homeowners with peace of mind. Knowing that major systems and appliances are covered can alleviate the stress of unexpected repairs or replacements. With a home warranty, you can rest assured that if your HVAC system suddenly stops working or your refrigerator breaks down, you won’t have to bear the full financial burden. 

This sense of security can be invaluable, especially for new homeowners who may not have a buffer for costly home repairs. Even if you buy a turnkey property, or a fully renovated property that is ready for move-in or can be immediately rented out, you may still encounter maintenance issues with appliances. Additionally, home warranties offer convenience by simplifying the process of requesting service and coordinating repairs. By investing in a home warranty, you aren’t just protecting your home but also investing in your peace of mind. 

Coverage Details and Exclusions 

What does a home warranty cover and what is excluded? What are home warranties coverage details and exclusions? When considering home warranties, you should carefully review the coverage details and exclusions to understand what’s included and what’s not. Coverage details typically outline the specific components of your home that are protected, such as major appliances, electrical, plumbing, and HVAC systems. It’s crucial to pay attention to any limitations on coverage amounts and the duration of the warranty as agreed on with the home warranty provider. 

Home warranty policies often cover: 

  • HVAC systems 
  • Refrigerators 
  • Plumbing 
  • Electricity 
  • Water heaters
  • Stoves 
  • Laundry facilities (washer and dryer) 
  • Leaky roofs 

Exclusions are equally important as they specify what the warranty doesn’t cover, which could include pre-existing conditions, cosmetic issues, or improper maintenance. Some warranties cover outdoor amenities like swimming pools, while other policies will specifically exclude them. Be sure to check with your provider whether your home warranty covers normal wear and tear and how much the service fees for various repairs will be. 

Other common exclusions from home warranty policies include: 

  • Foundation/structural issues 
  • Damage to walls or windows 
  • Flooring 
  • Small appliances (e.g. toasters) 
  • Environmental hazards (e.g., mold, radon, etc.) 

Understanding these exclusions can help you avoid surprises when filing a claim. By familiarizing yourself with both the coverage details and exclusions offered by your service contract, you can make informed decisions about purchasing a home warranty. 

How Much Does a Home Warranty Cost? 

According to Investopedia, the average cost of a home warranty is about $430-$816 per year. However, each policy is different, and your total cost will vary depending on the coverage included. Additionally, if an appliance repair or replacement exceeds the limits of your warranty policy, you will be required to cover the amount in excess. 

The average contractor or service call fee (also known as a trade call fee) is about $55 to $150. If the repair or replacement cost happens to be less than the service call fee, you’ll usually be able to pay the lesser amount rather than the full fee. 

Pros and Cons of Home Warranties 

Before you decide whether to purchase a home warranty for your home, here are a few considerations on both sides. 

Pros 

The primary advantage of a home warranty is that it can provide financial protection against unexpected repairs or replacements of major systems and appliances in your home. Especially if you’re a homeowner without a solid emergency fund, this home warranty can provide a buffer and help you save on repair costs. 

Here are a few other benefits of home warranties: 

  • Can benefit a seller, seeing as a warranty could help field some potential buyer complaints after the sale. (note that the purchase of a home warranty does not prevent the seller from being legally obligated to disclose all known issues with the home). 
  • Protects homes with older or worn-down appliances. If your home was previously owned and some of your home’s appliances are nearing the end of their lifespans, a home warranty could save you money. 
  • Helps you find trusted contractors in the local region. This can be especially helpful if you’re new to the area. The warranty company or service provider handles tracking down local contractors. 
  • Policies can be renewed, are generally longer, and have more coverage than a manufacturer’s warranty, making your customer satisfaction more likely. 

Cons 

However, home warranties also come with some drawbacks. Here are a few: 

  • Service call fees apply for each visit from a technician. 
  • There’s always the possibility that not all repairs may be covered. There may be limitations on the total amount that can be paid out for repairs or replacements.  
  • Home warranties also do not cover aspects of the home that have not been properly maintained—proper maintenance is somewhat of a grey area, seeing as there is no clear definition. Some warranty companies may use “lack of proper maintenance” as an excuse to not cover certain repairs or replacements.  
  • Less opportunity to shop around for a contractor that offers the best price or boasts great reviews. Your home warranty company chooses who completes the repairs, and you have little to no say in the matter. Also, if you have a preference on what brand you’d like for your new oven or dishwasher replacement, you will likely have to settle for whatever the home warranty company has in stock.  

Ultimately, weighing these pros and cons can help you decide if a home warranty is a good investment for your particular situation. If you’d like to forego a home warranty, it can be just as helpful to put a certain amount of money into an emergency fund each month in case these types of issues arise.  

Tips for Choosing a Home Warranty and Home Warranty Company 

However, if you’ve decided to move forward with choosing a home warranty, consider four essential factors when selecting one to ensure you make the right choice for your needs. 

  • Start by evaluating the coverage offered by the warranty. Make sure it aligns with the specific systems and appliances in your home. 
  • Then, assess the reputation of the warranty provider. Look for companies with a track record of prompt and reliable service. 
  • Review the contract details carefully. Pay attention to coverage limits, exclusions, and any additional fees. 
  • Finally, compare pricing plans from different providers. Balance the cost with the level of coverage to find the best value for your situation. 

Conclusion 

In conclusion, home warranties can provide peace of mind for both buyers and sellers in real estate transactions. They offer coverage for major home systems and appliances, with certain exclusions to be aware of. 

Understanding how home warranties work and carefully selecting a reputable provider can help you make an informed decision. Consider the pros and cons and follow these tips for choosing the best home warranty company to protect your investment. 

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