You’ve accepted a great offer on your home. Then, two weeks before escrow closes, you hop in the shower and the water runs ice cold. You head downstairs to check on the water heater and notice it’s leaking. Most real estate agreements require that a house remain in the same condition as when the buyer viewed it until they take possession, so you know it’ll need to be fixed or replaced quickly. How will you pay for the repairs, which may total $1,000-$3,000?
Home emergencies happen; it’s estimated that 80 million appliances need to be serviced each year. Anyone who’s had their gas range break down in the middle of hosting a dinner party or dealt with a busted AC in the heart of summer knows that trouble can arise at inconvenient times.
Enter the home warranty. A home warranty can help you prepare for the worst during the chaotic period of selling your home — whether it’s the water heater or refrigerator that goes kaput. With a policy in place, instead of panicking, you can simply call your provider. Plus, home warranties can be used as marketing incentives to attract buyers and provide a little extra peace of mind.
We’ve consulted real estate experts and trusted web sources to bring you these 10 key insights about home warranties anyone selling a home should know. This guide will cover:
- How a home warranty differs from homeowners insurance
- Which types of repairs warranties typically do and do not cover
- The process of transferring a warranty to a buyer
- How a home warranty benefits the seller during the home sale process.
1. A home warranty isn’t the same as homeowners insurance.
It’s easy to confuse homeowners insurance and home warranties because they both cover home repair costs — but they are night and day in the coverage that they provide.
Homeowners insurance covers catastrophes that happen to the house, such as fire, flood, or earthquake damage. A home warranty, on the other hand, covers the repair and replacement of internal systems in your home, such as the HVAC unit, plumbing, water heater, electrical, and appliances.
Most home warranties are 12-month contracts that typically cost between $25 to $75 a month, or $300 to $600 per year. However, more expansive plans can cost up to $1,750 annually. Additionally, you’ll need to pay a service fee of around $60 to $135 each time you call a contractor to come out to make repairs or to replace items. This fee is nominal when you compare it to hiring an experienced contractor, plumber, or electrician yourself without the home warranty discount.
Since the service fee from the contractor-of-choice is usually charged per visit, it’s the smart play to create a list of all issues that need attention so that you can limit your service fees.
Keep in mind that your home warranty provider may send a contractor who specializes in your primary problem. So if you’re placing a call for a broken dishwasher, they may be able to handle other plumbing issues (like a leaky faucet) that your warranty covers, but they may not be able to handle an electrical issue.
2. Home warranty plans vary in their coverage.
Like homeowners insurance policies, home warranties also come with rules and restrictions to their coverage, explains Cindi Blackwood, a top-selling real estate agent in the Little Rock, Arkansas:
“Home warranties are all very different, and many people don’t read the fine print to find out exactly what’s covered,” says Blackwood, who’s become well-versed in navigating warranties after nearly 20 years in real estate.
“Most policies don’t cover maintenance on your systems; they are meant to supply cost savings when your home’s main systems and appliances stop working.
Blackwood also notes that the home warranty policyholder can elect different levels of coverage.
“Some policies offer add-on coverage, such as covering additional plumbing like a hot tub,” she explains. “And most warranty companies will typically fix things until it can’t be fixed anymore. At that point then they will replace it, however there are limitations.”
For example, it can cost you $3,250 to $12,856 out of pocket to replace an entire HVAC system on average. However, many home warranties will only pay a certain portion toward replacing, say, a $6,000 HVAC unit, according to Blackwood.
According to This Old House, a more than 40-year-old home enthusiast brand with 15 million readers per month, a typical home warranty is going to cover the following appliances and home systems:
- Built-in microwave
- Oven, stove, and range
- Garage door opener
- Trash compactor
- AC and heating
- Water heater
- Garbage disposal
- Instant water dispenser
- Smoke detectors
- Central vacuum
- Ceiling fans
The right coverage is key when picking a home warranty plan.
Let’s say you live in an older home with outdated plumbing, electric, and HVAC system, but you’ve just remodeled the kitchen with brand new appliances. In that situation, you may only want to offer a systems only plan. If your appliances are older, but you’ve just installed a new HVAC, then opt for the appliances only plan. When both your appliances and systems are outdated, then pick the combo plan.
3. Offering a home warranty to buyers may cost you nothing.
While general home warranties charge monthly or annually for 12-month coverage, most home warranty companies do offer a limited seller’s home warranty – often for free. These policies cover the home while it’s on the market for no cost to the seller.
“In my market, getting a home warranty when you list your home for sale is a no brainer because there’s no additional cost to the seller. The price of the warranty comes out of the proceeds, not out of your pocket. Plus, for the most part, the seller’s coverage is free, even if they’ve used the warranty to make repairs,” explains Blackwood.
Home warranty companies offer a complimentary seller’s home warranty because it works in their favor. In most cases, the buyer is going to want to pay for an annual home warranty (or accept the seller’s offer to pay for a home warranty), so by offering to cover the seller for free, they get more business.
The seller can use this policy to make repairs or replace systems that go out while the home is listed or in escrow — provided that these issues were not pre-existing. If the seller does use the policy while it’s in place during the listing or escrow period, they only pay the cost of the service call, not the cost to purchase a policy.
When the home sale closes, this warranty is then transferred to the buyer with a full year of coverage in place, and the cost typically comes out of the seller’s proceeds. If the buyer opts not to accept the home warranty, the warranty is then cancelled at no cost to the seller. However, this does vary from company to company.
While most companies do offer this seller-friendly arrangement, there are some companies that do charge a nominal fee, like $75 to $100, to provide this coverage.
4. A seller’s home warranty protects you during the listing period and can help you save on repair requests.
Home warranties are a big help during escrow when your buyer submits a list of repair requests after getting their home inspection report. If any items on the repair list are covered under the home warranty, then you can use the policy to help cover the costs of those repairs.
“I tell my sellers that it only makes sense for them to have a home warranty in place during escrow, and it’s absolutely essential if the sellers are no longer living in the home,” explains Blackwood.
“Getting a home warranty was a home run for my sellers who were asked to have a leak under the bathroom sink fixed as well as a few other plumbing issues. Instead of spending hundreds on an independent plumber to make the repairs, they used their home warranty, which only cost them around $100 to have all of the issues fixed.”
5. Home warranties are often transferable from seller to buyer.
Some homeowners are such big believers in home warranties that they maintain one — along with home insurance — the entire time that they own their home.
For these sellers who already have a home warranty in place prior to listing, that warranty is transferable to the new owner. But it might be a smarter move to cancel your existing warranty and get a new one specifically for the home sale.
“Typically, home warranties provide both seller coverage, and buyer coverage. Once the home sale closes, the warranty starts over fresh with the buyer and provides a year of coverage,” advises Blackwood.
Remember, if you get the limited seller’s home warranty that’s valid for the duration of your listing on through closing, you pay little to nothing for that warranty. And you only pay for the buyer’s portion (if you offer to / they choose to accept it) out of your proceeds when the home closes.
This is actually better for the buyer because that way they get a full year of the new home warranty, rather than the remainder of your existing home warranty. Plus, your home warranty company may be willing to refund you the remainder of your existing policy when you activate a new seller’s warranty on the property.
6. A home warranty is a popular incentive to attract buyers in a slow market.
When sprucing up your property isn’t enough to stand out from the competition, a home warranty may be just the edge you need to get that offer. By including the offer to cover the costs for a 12-month home warranty in your listing, you give potential buyers a reason to at least come in and take a look at your house before seeing other properties. And every buyer you get through the door increases your chance of getting a good offer sooner rather than later.
If other listings are also offering a home warranty incentive, consider upping yours to a 24-month policy. The hundreds more you’ll spend on a longer warranty is insignificant when you consider the housing costs (mortgage, utilities, etc.) if your house sits on the market for months on end. Plus, you may be able to negotiate a discount for a 24-month policy with your home warranty company.
7. In a seller’s market, you likely don’t need to offer a warranty as a carrot, but…
In a seller’s market, you don’t need to dangle the offer of a home warranty to bring in buyers. But home warranties still have a role to play in hot markets. Not only do they provide you with protection should anything break before your home sale closes, they are a powerful tool to use during negotiations once you’ve accepted an offer.
“It’s more advantageous for sellers to make the deal that’s on the table work for all parties rather than terminate the sale and go back on the market. You’ll have to answer red flag questions as to why the deal fell through, and you’ll need to wait to get another buyer in place,” explains Blackwood.
“It costs time and money to relist a house, as the seller has to continue paying the mortgage on the property every single day. Rather than starting over, it saves money to make the deal work by offering a home warranty in place of completing repair requests submitted by your buyer.”
8. A home warranty provides your buyer with peace of mind about their purchase.
By offering a home warranty, you provide your sellers with peace of mind that should anything go wrong with their major life purchase, the home warranty will cover the bulk of the expense. And that may be just what you need to close the deal with buyers so nervous about homeownership that they want you to repair your house until it’s in brand-new condition.
“No buyer wants to spend all of their savings on a down payment and closing costs, only to move in and have the HVAC go out a week later when they’ve got no savings left to cover the cost,” explains Blackwood.
“Home warranties are attractive to buyers because it provides them with confidence that they’re not going to be in dire straits should something major break within the first year in their new house.”
9. A home warranty is useful in negotiations when buyers present repair requests.
Having a seller’s warranty in place for the duration of your home sale makes sense in a lot of cases, but sometimes you may just want to save the warranty for the negotiation table.
If you’re confident enough in the condition of your home that you feel you can forego a home warranty during your listing period, keep the offer of a home warranty in your back pocket. When you get to the stage where your buyer turns over a repair request list, you can counter with the offer of a home warranty.
This strategy is a win for both the seller and their buyer. The seller wins because they don’t have to pay for those repairs out of pocket. It’s a win for the buyer because they get to oversee the completion of the repairs being done on their new house, plus they get the use of the home warranty for its duration should other problems arise.
10. Deal hanging by a thread? A home warranty can help.
If you play the home warranty card right, it may just save your home sale.
“I’ve had a situation where my sellers didn’t have a lot of cash to make repairs, and the home warranty became a deal saver. This was an older home, and the buyers wanted the outdated HVAC replaced. My sellers just couldn’t afford that,” recalls Blackwood.
“That sale went from ‘no deal’ to the closing table because the home warranty bridged the gap. The cost of the home warranty came out of the proceeds rather than my sellers paying out of pocket to replace the HVAC.”
While it may sound crazy to pay for the extra protection of a home warranty on a house you intend to sell, remember that your home is a major financial investment. A home warranty protects the value of that investment should anything go wrong in the eleventh hour. Warranties are popular in dealings with cars and electronics, too, for the peace of mind they’re able to provide on a major purchase.
When in doubt, consult your real estate agent on whether you should use a home warranty for listing coverage or as an incentive to attract buyers depending on local market conditions. He or she will know what’s typical for the area, and how to leverage the warranty to craft the best possible deal.
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