Home Warranty Market Grows But Experts Caution That Expectations May Exceed Policy Limits
That elegant English Tudor bought with your life savings has an air conditioning system that dies on the hottest day of the year. Months later, the furnace conks out and the plumbing begins to leak.
It’s a nightmare most home buyers have about their dream house.
Such calamities do occasionally occur, but if the house carried a warranty, most of the expensive repairs would be covered. That’s the point the real estate industry tries to convey with growing success.
More and more warranties are being sold nationwide. Last year, 801,255 contracts were issued, up from 745,809 in 1994 and 640,000 the previous year, according to the National Home Warranty Association. The St. Louis-based trade group predicts at least a 10 percent increase in 1996.
The largest market is in California, where about three-quarters of all houses sold carry a warranty. Sales contracts there require buyers to accept or reject these plans. But Realtors report other regions are catching on, especially the Northwest and South.
Warranties can be a good marketing tool for sellers and a financial lifesaver for many cash-strapped buyers, but consumers must understand not all plans are created equally. Most have limited coverage; some carry high deductibles or added service charges. Premiums will vary.
“I urge everyone to read the fine print,” said Jordan Clark, the president of the United Homeowners Association, a Washington-based consumer group. “Sometimes they’re not quite what they seem.”
Home warranties - a kind of insurance or service contract often purchased by sellers through their real estate agents - typically cover the mechanical workings of an existing house for one year. That includes items like the air conditioning system, furnace, water heater, interior plumbing systems, interior electrical systems (excluding light fixtures) and built-in major appliances. (Four-year plans can be bought for new homes, too.)
The coverage applies to what the warranty companies consider normal wear and tear, not pre-existing conditions, problems resulting from improper installation, or anything considered aesthetic.
“We don’t cover rust or corrosion. Nobody covers scratches … or broken glass,” said James R. Beach, marketing director for Homeowners Marketing Services Inc. in Sunrise, Fla.
There are other restrictions to consider.
Policies never cover structural items such as foundations, windows or walls; the homeowner’s insurance may apply.
They also omit swimming pools or hot tubs, although separate spa plans can be purchased. Portable air conditioning units also aren’t included. And some plans exclude refrigerators, washing machines and dryers since they’re considered movable appliances.
The policies - which range from $250 to $600 - can pay for themselves, if say, a water heater needs replacing. But deductibles can run as high as $150 for each call, and some companies may tack on a separate service charge to be paid to the business doing the repairs. Many of the more expensive policies, however, have deductibles as low as $35.
Separate pool or spa plans average between $75 and $150; here again, structural defects aren’t covered.
Some plans also have spending caps on certain items.
For example, Electronic Realty Associates, or ERA, the nationwide real estate company that also sells warranties, puts a $1,500 limit on heating and air conditioning systems. American Home Shield of Memphis, puts a $500 cap on concrete-slab-encased plumbing and covers sewer lines up to 100 feet outside the home.
Clark urges consumers to weigh the cost of warranties against potential problems in the home.
“Don’t buy a home simply because it has a warranty. Buy a home for what it is,” he said. “All things being equal, if it has a warranty it can be an advantage. But they (warranties) are created as a marketing tool. You have to keep that in mind.”
Real estate experts say homes with warranties often do sell quicker.
A recent study conducted for the National Home Warranty Association found that covered homes move on average 27 days faster than ones without coverage and are sold for 2.4 percent more money.
The trade group also claims that homeowners often get their money’s worth: For every contract sold there were 1.6 claims paid last year.
“It gives the seller an additional edge,” said Dorcas Helfant, who runs Coldwell Banker-Helfant Realty in Virginia Beach, Va.
While she recommends all buyers get home inspections to help catch any defects before a sale is finalized, she thinks a warranty gives extra peace of mind afterward.
“The components of a home are not forever,” Helfant said. “Homes are like automobiles. They require care and maintenance.”
xxxx Buyer beware While warranties can prove a good marketing tool for sellers and a financial lifesaver for many cash-strapped buyers, consumers must understand not all plans are created equally. Most have limited coverage; some carry high deductibles or added service charges. Premiums will vary.