For many buyers, a home purchase will be the most significant investment of a lifetime, and a lot is riding on the decision. That’s why buyers should have the home checked out by professionals. Between the lender, buyer, and Realtor® requirements, recommendations, or choices, these include home inspection, termite inspection, appraisal, title search, well inspection, and possibly others. The inspections will not guarantee that nothing will go wrong with the home. Appliances, heating and air systems, and garage door controls may stop working which is exactly why a home warranty appears so often on a buyer’s closing statement.
Often, a buyer does not have to decide to buy a warranty because the seller chooses to pay for one. Great! As a buyer, take it. No matter if the buyer or seller pays for this insurance, there are important questions to ask such as:
- What does it cover?
- How much does it cost?
- Which company should I choose?
- Should I pay for upgrades?
- Should I renew after a year?
What Does a Home Warranty Cover?
2-10 Home Buyers Warranty states, “Seven out of every ten homes will experience a system or appliance failure during a year.” Now, maybe a buyer has no issue paying a $50 repair of a refrigerator, but the big question is what happens if there is a significant breakdown or multiple problems? That’s where the costs start to add up and can put a strain on a budget. Particularly first time home buyers who may have purchased with no money down may struggle with such a repair bill so soon.
Pam Hurt, Account Executive with 2-10 Home Buyer’s Warranty, says, “Only 53% of homeowners said they could cover an emergency costing over $400 without going into debt. With an average repair cost of $466 per incident and an average replacement cost of over $1,200 for major systems and appliances, it is easy to understand why most homeowners can’t easily bear the burden of a major failure.”. That’s where warranty coverage could bridge this gap for a new homeowner. So, what is covered and maybe more importantly, what is not?
Typical Areas of Concern
- HVAC System
- Well & Septic
First of all, keep in mind that these plans cover normal wear and tear. Therefore, a garage door with a dent from a car causing the garage not to open would not be covered.
Biggest Repair Fears for Buyers
Typically, the most popular worry revolves around the cost to repair or replace the HVAC system. According to 2-10 Home Buyers Warranty, According to 2-10 Home Buyers Warranty, “Homeowners are 1.5 times more likely to have a service request on their HVAC system than any other type, with an average replacement cost of $3,698 for a central air conditioning unit.”
Most services offer coverage for HVAC at some level and often provide a premium option to cover additional areas of this system. Another common worry involves the roof. Often roof repairs do not require a roof replacement and are just repairs that do not meet homeowners insurance coverage levels. So, having coverage against leaks could benefit a new homeowner. Additionally, plumbing and electrical systems are complicated and within the walls, foundation, or attic. Thus, having coverage against the myriad of potential issues would help owners sleep better.
“Homeowners are 1.5 times more likely to have a service request on their HVAC system that any other type, with an average replacement cost of $3,698 for a central air conditioning unit.”
Do Not Forget the Appliances
Finally, there are appliances. In most homes, appliances are probably years old, and repairs come up. It can happen with new appliances too. If the refrigerator, washer, dryer, stove, or dishwasher are out of warranty, then looking into coverage could be worthwhile.
Now, we have mentioned a lot of systems within a home. There are much more areas which are covered either through standard or premium levels, but every home warranty company and individual plan differ in what is covered and excluded. It is up to the buyer to decide which features are most important and compare that to home warranty plans.
Home Warranty Plans
Each warranty company has different names for their coverage options, but most plans are a form of standard plan, premium coverage plan, and usually some additional options. The more coverage and options, the higher the cost. Do keep in mind that each plan level will vary among available warranty companies.
Standard Home Warranty Plans
These base level plans assist with many common issues with HVAC, appliances, electrical, plumbing, garage doors, and other systems. Each covered item usually has a set maximum coverage amount, plus a deductible paid by the homeowner. Also, remember that some warranties, like 2-10 Home Buyers Warranty Service Agreement, is transferable between homeowners.
Premium Warranty Plans
Premium plans offer additional coverage above standard levels. These additional services either enhance already covered items on the standard plan or cover additional items not covered under the standard.
Additional Buyer Options
Sometimes there are other features in a home that may benefit from coverage during that first year of uncertainty. An additional option could be equipment servicing. Below are some examples of possible options:
- HVAC tune-up
- Pool equipment
- Septic system
- Well water system
New Construction Warranty
Licensed home builders provide at least a limited warranty on the building materials and workmanship used to build the home. This warranty covers at least the first year. Believe it or not, in a previous conversation with a licensed home inspector, he said that brand new constructed homes might have lots of issues. Corners may be cut in construction or completed incorrectly. So, the first idea is to consider a home inspection on new construction.
Idea number two is to consider an extended warranty for newly built homes. These warranties offer protection for an extended amount of coverage for many of the same systems mentioned in this article.
Home Seller Warranty Plans
Most have heard of buyer warranty plans, but can sellers get coverage? Actually, yes! Some companies offer plans for the seller during the listing period. According to 2-10 Home Buyers Warranty, homes with a warranty sell on average 11 days faster and for $2,300 more. So, a proactive seller could enroll in a seller warranty plan to provide protection during this transition period, plus possibly sell faster and for more. Reason being an established warranty on the home in advance of purchase may give prospective buyers more confidence in the condition of the home. Usually, the plan may be rolled over to the buyer at a competitive rate at closing.
Home Warranty Cost
Buying a home warranty is buying insurance to protect against risk. The standard plans seem to typically hover around the $450 – $500 (Which is also the usual amount shown when sellers offer a warranty on a purchase contract.) Although not required, many sellers offer to pay this cost to increase buyer confidence in the condition of the home.
Premium Level Services
Additional coverage for “premium” level services fall into about $200 – $300 over and above the standard plans. Something for a buyer to consider is adding premium coverage over and above the seller paid a standard amount. Furthermore, if there is room in the amount of seller paid closing costs for the buyer, then it could cover this and other premiums. An excellent way to avoid a buyer leaving money on the table from unused seller paid costs.
Individual Add-On Options
Maybe a full premium level program is not necessary. That’s where adding 1 or 2 specific items not covered on a standard plan may be beneficial. These additional options typically range from an additional $40 – $350, depending on the option.
Who Pays the Warranty Cost?
If a seller does not offer to pay for the warranty cost at closing, what are the buyer options? First of all, it rarely hurts to ask for something. A buyer could request the seller to pay the warranty cost. If the seller pays for a warranty, take it. That’s an easy one. What if that answer is no? That is where the buyer could pay for the cost. Again, buyers using a low or no down payment program may be limited on funds. So, this could be a tough decision to spend this extra money. Although, spending the money now could lessen the burden of potential necessary repairs during the first year of ownership.
Additional coverage or premium level costs are easier for the buyer to pay when the seller pays the standard level through closing. Again, the costs vary for all kinds of extra bells and whistles. Some will be important to a particular home or buyer. Others will not. Ultimately, a buyer’s decision will vary based on the home condition, systems to cover, who pays the cost, and the buyer’s risk aversion.
How to Choose Home Warranty Companies
Often, sellers will provide a home warranty for the buyer at the seller’s cost and notate it in the purchase contract. In these cases, the seller may dictate a certain warranty company. Although, usually the buyer may choose a company of their own. Typically, the seller is just agreeing to pay a set amount that would cover an industry standard warranty plan. Several national warranty companies include 2-10 Homebuyers Warranty, American Home Shield, Choice Home Warranty, Select Home Warranty, First American, and many more.
Especially important for rural areas, check for contractor coverage. Determine if there is sufficient coverage and if there isn’t, find out the policy of the homeowner choosing a contractor.
Should I Renew My Warranty?
Let’s say the homeowner has a service warranty plan in place from day one. Now, the warranty period expiration date is approaching. Should it be renewed or save the $400 or more? Again, it should all come back to what are the risks and potential costs of systems needing repairs over the next year. Then, the buyer needs to decide if the warranty renewal premium would have a higher likelihood of saving the homeowner money or if the owner could handle potential issues on covered items from cash on hand.
Another point to bring up is that some warranty companies offer a multiyear plan starting at day one of ownership. These plans may include 2 or 3 years of coverage for a discounted additional amount.