Home Warranties: Peace of Mind or Waste of Money?

They emerged as an effort by California real-estate practitioners in the 1970s to protect themselves from buyers unhappy with home appliances and mechanical systems that conked out or needed repair shortly after they moved into their homes. Since then, home warranties have gained a greater following.

More national companies offer them, having recognized how much the warranties appeal, and it’s no longer just salespeople. Salespeople still know they can be a powerful marketing tool to woo potential customers, particularly in a down market. Sellers also are eager to differentiate their home from the ever-increasing housing stock in a sluggish economy, as well as to protect themselves from litigation. Buyers want them to cut potential maintenance hassles as well as expenses. And home builders offer them on their newly constructed homes usually for a year, with some now extending them for an additional fee.

Homeowner David Pounder received a one-year warranty from the seller when he purchased a condo in Irvine, Calif., seven years ago. When his heater broke after six months and a part needed to be replaced, he found the warranty comforting. “I didn’t think I would need it, but I did,” says Pounder, who owns a freelance media consulting business. He has since sold that condo and moved to Boca Raton, Fla., and when he purchases another condo plans to buy another warranty or secure one from the seller again. “I didn’t know anything about warranties when I bought my first home, but now that I do, I know how important they can be,” he says.

Ken Baris, president of Jordan Baris Inc. Realtors, which operates two offices in New Jersey, thinks it’s a smart move for sellers to purchase a warranty for buyers, since they’re very affordable. “The seller gets coverage 10 days after listing the house through the closing and gains an edge, and the buyer gains coverage for a year from the date of closing,” he says.

Whether the warranty proves worthwhile for more than peace of mind, of course, is a gamble like any type of insurance. But with the average homeowner putting in two claims a year, it can be, home warranty company experts say. If a motor breaks down on a refrigerator, the repair cost could run from a low of $150 – far under the typical $300 to $400 annual warranty fee, to as much as $500, which could make it smart.

Warranties appeal for other reasons. First, many plans now feature a-la-carte or add-on options that can protect almost anything in a house, from a swimming pool to a security system to the freezer’s icemaker. A pool might cost an additional $150 to cover while the icemaker could run as little as $15, says Dave Sobel, vice president of sales for Home Warranty of America, Buffalo Grove, Ill.

Second, many plans now offer green upgrades, so that when an appliance or system can’t be repaired, the homeowner is entitled to a more energy-efficient unit. Home Warranty, for example, offers this choice through its GreenPlus option.

“We’re serious about saving the planet. If a kitchen appliance or washer/dryer breaks down and needs to be replaced, we’ll provide an EnergyStar product. This option costs $75 on top of the basic fee,” Sobel says.

Third, one of the biggest reasons warranties have gained a greater following is the competitive pricing. Basic plans may cover a dishwasher, garbage disposal, built-in microwave, range, oven, cooktop, trash compactor, refrigerator, washer/dryer, electrical system, doorbell, exhaust and ceiling fans, central vacuum system, burglar and fire alarms – all for only a few hundred dollars. Homeowners may get all the above items included, plus their heating, ductwork, plumbing and water heater for a bit more.

Comparing apples to apples in any plan under consideration is critical. The reason a washer/dryer and refrigerator may be excluded with an existing home plan is that those appliances often are moved and therefore are more likely to incur some damage, says Dave Quandt of American Home Shield in Memphis, Tenn., which excludes them from its basic package.

Homeowners studying choices also need to know how the plan treats pre-existing conditions and what it excludes. Some may require a 30-day waiting period before homeowners can put in their first claim, which avoids potential fraud, says Sean Hicks, president of Warrantech Home Service Company of Bedford, Texas. An exclusion might include plumbing problems due to tree roots, he adds.

Finally, homeowners need to look to see if a service fee or deductible for a repair call is charged; many companies bill $40 to $60 per visit.

Home warranties for new construction are a bit different and often cover all systems and appliances for the first year. Orren Pickell of Designers & Builders in Lincolnshire, Ill., follows that approach and offers a lifetime warranty afterward, if clients annually pay to have the builder service their homes. The continued service fee depends on the home’s square footage and the complexity of its systems.

Before buying a plan, ask each potential provider the following questions:

• How long has your company been in business?

• Is it licensed by the state?

• Are your service contractors licensed?

• How much does your plan cost a year?

• Exactly what appliances and systems does your basic plan cover?

• What’s not covered and what can be added – and for how much?

• Do you charge a deductible or co-pay for each service call?

• If an appliance or system can’t be repaired, is it replaced with a similar unit or upgrade?

• Do you have a maximum number of service calls you’ll provide in a given year?

• Is there a 24/7 telephone answering service so you don’t have to wait until Monday morning?

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