Good... Or Good For Nothing?
Poll real estate agents around the country on the value and benefits of a home warranty policy and you'll receive a wide range of responses.
Some agents love them. Other agents feel they're a waste of money.
If you're unfamiliar with the concept, a home warranty is basically a service contract to complete future repairs and/or replacements on household appliances and systems.
Interest in home warranties seems to go in cycles... which seems so odd to me. I think that home warranties benefit both buyers and sellers, and I firmly believe they should be used in every real estate transaction.
Home warranties are available not only for single-family homes, but also for condominiums/townhomes, vacation homes, rental properties, and multi-family homes, and they typically cover the cost of repairing or replacing systems and components - such as furnaces, air conditioning, plumbing and electrical systems, dishwashers, ovens, garbage disposals, water heaters, and more. Because these items are not typically covered by a homeowner's insurance policy, the home warranty provides coverage not otherwise available. The cost of replacing a single dishwasher alone could be more than the cost of the annual home warranty policy.
I believe that a home warranty complements a homeowner's insurance policy by providing an added layer of protection. Combined, they can provide enhanced home coverage.
Of course, I'm not the only one who thinks home warranties offer great value for buyers and sellers.
If you're a seller, you should know that research from the National Home Warranty Association estimates that, on average, listings with home warranties sell 50% faster than homes without warranties. And Business Week Magazine indicated that homes with home warranties sell at a premium of 3% in higher price.
Many agents feel that home warranties signal to a buyer that there are potential problems with a home. I couldn't disagree more! Let's be honest: every home has issues, and homes (and their systems and appliances) age with every day that passes. That means that each passing day increases the probability that repairs will be needed. A home warranty isn't a red flag to a buyer; instead, think of it as a signal that the seller understands that "things happen" after closing, and wants to help provide peace of mind for the new owner of the home.
They can also provide that same peace of mind for sellers. Many policies have an optional "listing period" clause, providing protection on the home during the time it's on the market. What a great idea! After all, who wants to put additional repair money into a property that they know they will be selling?
What Do Buyers Think About Home Warranties?
A Gallup poll showed that a whopping 8 out of 10 buyers prefer to buy a home which includes a home warranty. It's easy to understand why! Estimates are that 2/3 of all pre-owned homes experience two or more systems or appliances failures within the first three years after they are purchased.
This statistic supports the value of a home warranty in marketing your listings. Couple that with the U.S. Census' Consumer Expenditure Survey http://www.bls.gov/cex/ which reported that homeowners spend an average of $900 each year to repair home systems and appliances. That amount far exceeds the cost of most home warranty policies, which average between $300 and $500 for a year of coverage.
With home system/appliance repairs ranging from $65 to $2,000 - and replacements averaging $1,085 - a home warranty is a very wise investment. Because buyers often stretch financially to get into a home, the last thing they want to be hit with are unplanned (and unbudgeted!) repair expenses after closing.
Easy to Use
Not only can home warranties save money, they can spare a lot of aggravation as well! Claims are typically processed as follows:
- When a system or appliance fails, the homeowner calls the home warranty company
- The home warranty company confirms that the issue is one which is covered under the warranty
- If eligible, the home warranty company selects a pre-screened service provide from its roster and asks them to make an appointment with the homeowner
- At the appointment, the problem is diagnosed and the contractor calls the home warranty company, who then authorizes repair/replacement (again, assuming the item is covered)
- The homeowner pays a service fee to the contractor (if applicable), and the warranty company pays for the balance of the repairs.
Do the research
There are many companies offering home warranties, and typically most companies offer several different types of policies. Buyers considering the purchase of a home warranty should ask these questions:
- Are all of the systems and appliance in the house new and/or under warranty? If so, will that warranty transfer with the sale of the house? Hint: often appliance warranties are voided upon the sale of a home!
- Do I have the funds available at short notice to handle the repair of potentially multiple large repair or replacements of appliances and systems?
- Is the cost of the home warranty like to be more, or less, than the cost of repairs and replacements?
- Do I have a roster of proven professionals to call upon in the event of a problem?
- Do I value the peace of mind a warranty provides?
- Does the home warranty cover the areas of concern? If not, are there add-on policies available?
And of course whether you are purchasing the home warranty for a client, or for yourself, read the fine print! Many home warranties have exclusions... and no one wants the surprise of discovering that an item requiring repair is excluded from coverage. There isn't a home warranty program out there that covers everything, so be sure that the plan selected provides the appropriate level of coverage.
You can also find websites, such as http://www.homewarrantyreviews.com, that provide information on home warranty companies. Don't forget to check with your local Better Business Bureau http://www.bbb.org/ to be sure the warranty firm is reputable. Angie's List http://www.angieslist.com/ is another great source for unbiased reviews.
Not Convinced Yet?
Let me put this as simply as possible: having a home warranty, particularly on a pre-owned home, reduces risk and liability. Think of it as an inexpensive risk-management tool. Estimates are that as high as 65% of problems that end up in litigation or as an E&O claim are one which would have been covered by a warranty.
In fact, many E&O carriers offer lower premiums for real estate companies which consistently use home warranties.
I strongly recommend that you suggest to your sellers that they purchase a home warranty when their home is listed. If they're not willing to do so, you may want to bear the cost of the warranty yourself. It's a good business practice, and there's no telling what it could save you (or your clients) in the long run!
Not Just For Buyers and Sellers
Although we've talked about home warranties in the context of buying and selling homes, home warranties can be purchased by consumers living in their home with no plans to sell.
Because our homes are typically your most valuable asset, a home warranty can help take the "ouch" out of home ownership. Whether a home is decades old or brand new, a home and all its systems are subject to unplanned challenges. Systems fail, and appliances break down. A home warranty plan can cover the cost of these often costly repairs.
What's Your Experience?
Are home warranties part of your business plan? Do you have horror - or success! - stories to share? If so, I'd love to hear them!
By Denise Lones CSP, M.I.R.M., CDEI - The founding partner of The Lones Group, Denise Lones, brings over two decades of experience in the real estate industry. With expertise in strategic marketing, business analysis, branding, new home project planning, product development, and agent/broker training, Denise is nationally recognized as the source for all things "real estate". With a passion for improvement, Denise has helped thousands of real estate agents, brokers, and managers build their business to unprecedented levels of success, while helping them maintain balance and quality of life.