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Tempted to put home repair insurance (also called a home warranty) on the chopping block to boost your bottom line at closing? Why should you have to pay one more pesky fee?
Well, the home warranty is actually a huge selling point for buyers and not something you should refuse to negotiate on or casually take off the table.
Jeffrey Chubb, a 9-year veteran of the Boston real estate scene and agent who’s sold 72% more properties than his peers; home warranty expert Joseph Carbone, CEO at Helping American Homeowners Association (HAHA); and top insurance adjusters shared with us all the basics on home warranties and selling your house. We then pored over reports on historical home warranty trends to see where demand for this type of insurance is headed.
What we found is home warranties are attractive as ever to homebuyers, who’d prefer not to shell out a couple grand on a broken appliance the morning after they close on house. Plus, as appliances get more complex and trickier to fix, warranty sales are expected to rise.
Follow this advice and you won’t nickel and dime over the wrong point of contention at closing, or let your valuable insurance offering to buyers go unnoticed.
First off, what is home repair insurance (aka, a home warranty)?
Homeowners count on their big-ticket appliances to do the basics: keep their clothes clean, their cola cool, and their showers warm.
The steady hum of the refrigerator coils or sloshing of the washer is music to their ears, while the pop or clank of a malfunctioning part may be the sound of thousands draining from their bank account.
Home repair insurance, also called a home warranty, offers protection against these types of emergency expenses that arise from appliance wear and tear or an unexpected breakdown of your home’s main systems.
The insurance covers the policyholder in the event that the furnace goes kaput or the tub jet motors stop working.
“One couple purchased a home, and within a month, the water heater broke,” said Chubb.
“Home repair insurance covered the cost of the new heater at a time when the buyers were cash-poor from purchasing their new home. It came in handy.”
Historically, the home warranty is a point of negotiation when you sell your home. In fact, 20% of warranties are purchased during resale, and typically transferred to the buyer of the home at closing.
Sellers may proactively offer the home warranty as a selling point, or buyers could request it during negotiations. Typically, the seller does pay for it though, and it’s one of the charges you’ll see appear on your seller’s closing statement, which details all the finances of your transaction.
The rest of home warranties are those renewed by homeowners (65%) or those sold directly from insurance companies to homeowners (15%).
Home warranty sales breakdown
“Some people don’t want to be bothered with shopping around for contractors, or they don’t want the hassle of unexpected bills when an appliance breaks,” said Carbone. “In such cases, a home warranty offers peace of mind and an easy way for people to obtain necessary repairs without fuss or bother.”
What’s the difference between home repair insurance and homeowners insurance?
Homeowners insurance protects your home in the event that it sustains damage from a fire, storm, or other accident. It also may cover your personal property in the case of a theft or break-in.
Home repair insurance, on the other hand, covers normal wear-and-tear or the unexpected breakdown of your major appliances and systems. You can get home warranty coverage a la carte or all inclusive, and it may include:
- Appliances such as stoves, refrigerators, dishwashers, and garbage disposals
- Plumbing systems, including fixtures
- Electrical systems, including lighting fixtures such as ceiling fans
- HVAC units
- Water heaters
- Garage door openers
Carbone recommends reading the fine print very carefully on all home warranty contracts and asking questions if you aren’t sure about what’s covered.
“Some people find to their disappointment that things they thought were covered aren’t,” he said.
What is covered varies policy to policy. A la carte warranty coverage may include all appliances but exclude HVAC units, for example.
Lower monthly payments tempt many homeowners into a la carte home warranty insurance, but when the big bills arrive to replace major expenses such as HVAC units, lower monthly payments pale by comparison.
Are home warranties desirable in today’s market?
In an age when smart technology and cutting-edge innovations have changed the way we watch TV, listen to music, and even vacuum the floors, so too are major home appliances becoming new-fangled, high-efficiency machines.
According to a report on the home warranty market issued by Colonnade Advisors in February 2018, home warranties have always been a relatively inexpensive way to attract more buyers to your home.
But today, home warranty sales are growing at a 5% clip and will only be in higher demand as these new iterations of old-staple appliances get more complex and difficult to repair.
Home warranties increase in marketing value if you’re selling an older home with dated appliances. Without that insurance coverage, a buyer might ask you to replace your decades-old water heater during the home inspection negotiations.
How much does home repair insurance cost?
Peace of mind comes at a price.
In 2016, home warranties were a $2.6 billion market. The Colonnade report lists the annual retail pricing for home warranties at $500-$750 on average.
Keep in mind that:
- Comprehensive coverage costs more than a la carte.
A la carte pricing that covers only home appliances may start at $18 a month but cover only $1,000 worth of appliance damage. Another policy offered by a competing company at $34 per month may cover up to $10,000 of appliances—10 times the coverage for slightly less than double the monthly cost. Shop around and compare prices and coverage amounts before purchasing. It may be worth the price tag, especially for homes with aging appliances and systems.
- Some warranties cover sellers during the listing period and then transfer to the buyer.
HAHA’s coverage offers packages that cover homes during the listing period. That’s an attractive option, protecting you in the event that something breaks while your home is on the market. Then, that package passes from you (the seller) to the buyer and maintains coverage for a full year after the closing.
While you evaluate home warranty plans, ask yourself:
- Does the company offering the coverage require an inspection or repair log to maintain coverage?
If yes, what must I do to continue coverage? What might forfeit my claims later?
- Am I willing to call multiple contractors or visit various retail stores to shop for new appliances to get the best price?
Or would I rather file a claim for a replacement and enjoy the convenience of a check in the mail to get exactly what I want? Another main benefit of some home warranties is access to the insurance company’s network of verified contractors. Talk to your real estate agent about the types of policies that are common in your market.
How to market your home warranty to buyers
American Home Shield, the largest home warranty market participant, estimates 30% of home resales include a home warranty.
The home warranty becomes doubly important if you’re selling in a market and your competition on the block is offering buyers home repair coverage.
“If your competition has it, it may help give you a competitive edge,” said Chubb.
Because your home warranty is a big selling point for buyers, you want to weave it into your marketing plan and make sure it draws attention. Don’t let it get lost as a single line on the seller’s closing statement.
Here are a few ways to make sure the coverage doesn’t go unnoticed:
- Mention the home warranty in your listing description.
Go to any top real estate listing site and you’ll notice that some properties mention the home warranty, while others don’t. If you are offering buyers a home warranty, the listing description is one place where you can shout it from the rooftops. A simple mention of the inclusion of this insurance and the company that’s providing it will suffice.
- Leave out any written materials you have on the home warranty for display during showings.
Let buyers see for themselves what the home warranty covers by putting out a packet of materials about it on a table or on the counter during showings. Then they can thumb through it at their leisure, after wondering how much it would cost to fix your $5,000 Viking range stove.
- Make sure they get the opportunity to read the details.
Buyers should insist upon reviewing any promised home warranty paperwork at the closing. All coverage documents will be transferred to the buyer at closing or within one week after.
Home repair insurance to sell your house faster in a competitive market
Everything in real estate is a negotiation, and each offering or concession you make as a seller cuts into your bottom line.
At the same time, every buyer has unique needs, circumstances, and financial comfort zones. That’s why home repair insurance makes it so your home appeals to the largest net of home hunters.
Home warranty packages are most attractive in the event that:
- Your home is a decades-old charmer.
36% of buyers who decide to purchase brand-new homes do so to avoid plumbing (and electrical) issues, according to the National Association of Realtors (NAR). The old systems of your 1950s historic home put buyers on edge. For sellers looking for an edge to move properties faster or to help older properties with aging appliances sell quickly, home repair insurance may be just the ticket to offer that reassurance.
- Other sellers in your market are consistently offering home warranties.
All else equal, a home warranty may be the deciding factor in a buyers’ decision whether to make an offer on your home or your neighbors’ down the block.
- You have fancy, expensive appliances.
The cost of repairs only goes up as the inner workings of appliances get more complex.
When in doubt, talk to your real estate agent who knows what buyers expect in your local market and where your home stands in the mix.