Home Warranty Policies Can Be Good For Both Buyer And Seller

Provided By Realty Times

Home warranty policies are a common feature of residential real estate purchase transactions. These policies are insurance policies, usually a year in length, and cover items such as water heaters, dishwashers, and plumbing systems. Coverage and price vary from company to company and policy to policy. Like many other forms of insurance, there is usually a deductible amount (or service charge) and it is common that they will only pay for service by an authorized provider.

Who is to pay for a home warranty policy, what company is to be used, and how much coverage will be provided are all items to be negotiated between buyer and seller. As a matter of fact, though, because the costs involved are generally a relatively small part of the transaction – commonly they are less than $500 – these items may not receive a whole lot of attention from the principals.

In my own market area it is typically the seller who pays for the policy. Sellers may be told that the cost is a good investment because having such a policy in place helps to prevent a lot of post-closing hassles when – as often happens – something stops working as soon as the new owners unpack. There is truth in this.

In California the standard purchase contract form is produced by the California Association of Realtors® (CAR). It contains a provision for the purchase of a home warranty policy. The section reads like this:

[ ]Buyer [ ] Seller shall pay the cost, not to exceed $_________, of a one-year home warranty plan, issued by __________________, with the following optional coverages [ ]Air Conditioner [ ] Pool/Spa [ ] Code and Permit upgrade [ ] Other ___________________.
Buyer is informed that home warranty plans have many optional coverages in addition to those listed above. Buyer is advised to investigate these coverages to determine those that may be suitable for Buyer.

Now, most homebuyers are not likely to be particularly well informed about home warranty policies, home warranty companies, or the various optional coverages that are available to them. They will look to their agent for guidance. As a matter of fact, though, most agents are likely to have considerably less than encyclopedic knowledge of home warranty policies, prices, and coverage. They will, however, probably have general familiarity with a few. Agents are likely to have had or heard of experiences with the services provided by some of the companies. Most offices stock brochures from home warranty companies and/or have hosted presentations by company representatives.

So here is what happens: the buyer's agent, who is filling out the purchase offer, will name a company with which he is familiar, and, in consultation with the buyer, will specify any additional coverage that might be applicable. Moreover, because it is the buyer and his agent who are constructing the offer, it is likely that they will specify that the seller is to pay.

What about the cost? Not being likely to remember what a particular company's policies and optional coverages may cost, the buyer's agent will typically pick a number, say from $500 - $600, that probably exceeds the cost of a basic policy but that should be ample to pay for any additional coverage specified. Often, a knowledgeable listing agent may point out to his client that the actual cost is likely to be less than the limit specified.

Generally, this all works out ok. The buyer's policy winds up being less than the "not to exceed" amount, and the seller has no complaint.

The point to note here is that the dollar limit is not a credit. Suppose, for example, that the actual policy turns out to cost $450, and that the not-to-exceed amount was $600, and that the buyer had not contractually requested any additional coverage. Suppose also that, as is quite common, the purchase price did not include the refrigerator, which didn't matter because the buyer was bringing the refrigerator he already owned. The buyer gets a bright idea: purchase additional home warranty coverage for the used refrigerator he is bringing and tack it onto the policy the seller is paying for. Suppose it is $100. The limit is still not exceeded.

Yes, but unless it had been specified in the contract, the seller is not responsible for it. (Imagine if it had been in the contract. The seller probably would have said, "No, I'm not paying to cover the refrigerator you already own.")

Conversely, the buyer's agent needs to be sure his principal receives the level of coverage he intended. Most warranty companies have different levels of policies. ABC Home Warranty might have a Basic Policy for $325 and a Premium Policy for $400. Suppose the contract calls for the seller to pay for an ABC policy not to exceed $500. If the seller's agent orders the policy, guess which one the buyer will get? Who will order, or what level policy, should be made clear in the contract.

Home warranty policies are good things for both parties. But it should be clear at the outset exactly what will be purchased and who will pay.