If you are like most first time homebuyers, you are about to purchase the most home you can possibly afford and are willing to be strapped for cash for quite a few months to come. But this is not the time you want to be out the money for a major appliance repair or replacement. The Murphy's Law of Mechanics says that whatever can break probably will, and at the least convenient moment.

That is why more and more consumers are looking carefully at the advantages of buying a home warranty product. Once marketed exclusively through REALTORS® to home sellers as a means of positioning the home more favorably in the resell market, the home warranty is now being offered by companies such as American Home Shield directly to the end user - the homeowner.

Unlike home owner's insurance, which is only used in the event of a catastrophe such as fire or storm damage, a home warranty is a renewable contract that combines the best characteristics of an insurance policy and a service contract for all mechanical appliances in the home.

The advantage for the homeowner is that the contract is essentially a one-stop shop. Instead of compiling a list of service people in every specialty from plumbing to electrical to heating and AC work, he or she can make one phone call, describe the problem, and the appropriate service person will be dispatched. The service call is then set up between the service provider and the home owner. This is a service which is especially appreciated by homeowners who have relocated from one city to another, where they don't know anyone.

The home warranty also provides a win-win-win scenario for all parties who are in the middle of a real estate transaction. Home sellers (often at their REALTOR's® suggestion) are beginning to offer a home warranty product to protect the home. Not only do homes with home warranties sell faster and for more money, they offer a win-win-win scenario for every party involved in the real estate transaction, particularly the home buyer.

Sellers experience several advantages when they add a home warranty as a marketing feature to their home. For approximately $350, the seller is basically assured that any mechanical problems in the home will be fixed via a one-year service contract with the warranty provider. That means they are marketing the home with a value-added advantage that may distinguish it from a competing home down the street. It also means they can walk away from the closing knowing that a month or two down the road, the phone will not ring with a liability problem. That kind of peace of mind is worth the extra cost to many sellers.

The broker, or Realtor also benefits. The home backed by a home warranty is more attractive in the marketplace, and releases the broker and agent from liability should a mechanical component fail shortly after the home closes. Risk management is an increasing concern for brokers and agents, who are vulnerable to lawsuits and other actions by customers and clients.

The home buyer benefits from having a home warranty in place because they now have the assurance that when a problem arises, it will be fixed for approximately the cost of an ordinary service call, about $35 to $50 depending on the area in which the homeowner lives.

But home owners are cautioned not to make frivolous calls. Before you call the warranty provider, make sure your appliance is plugged in, or the circuit breaker is flipped the right direction, or you've tried the reset button on the disposal before you pick up the phone. Those types of pre-call investigations often solve the problem, and keep warranty costs down for everyone. Sometimes the warranty service person will ask the home owner to make a few investigatory steps, often to assure that the correct technician will be dispatched. If a garage door opener fails, it might be the remote or it might be an electrical problem in the wall of the garage. Asking the customer to use the remote before calling a technician save both the company and the customer time, inconvenience and money.

According to Scott J. Cromie, president and COO of American Home Shield, home warranties are primarily a risk- management tool.

"People who are in the middle of a transaction tend to look at home warranties as an insurance product. The people who use them, the home owner, use them as a service contract," explains Cromie.

"Insurance you hope you never have to use - that means a tornado hit your house or you've been flooded. But a warranty you are going to use a lot," says Cromie. "Our figures show that the customers use their warranties about two and a half times a year. That is about two claims a year."

About 70% of the dollars generated by the sale of the warranties are returned to customers in claims and servicing, Cromie allows. "At least 50% of those claims have a significant payment on behalf of the customer."

Most warranty contracts are approximately $350 for a one-year warranty, with the service fees of $35 to $50 applied only when a service call is made. Is it really worth it?

"If they are using the warranty two and a half times, yes," answers Cromie. "If an insurance company had the incident rate we do, things would be very different."

Cromie explains that with all mechanical systems covered under the warranty, the liability is very great. Although repair and replacement decisions are made on a case-by-case basis, the company's mandate is to fix the problem.

"About 11 percent to 13 percent of our total claims are for whole unit replacement," reveals Cromie. "Replacing a pump in a dishwasher is going to be significantly more expensive than the $35 service call, but replacing the whole dishwasher is even more costing several hundred dollars."

Because the service call is usually more expensive than the home owners are charged, American Home Shield is very motivated to fix the problem the first time. That means finding and having on call the best contractors in the area.

"Our position as the largest home warranty company and the fact that we have been in business for 28 years gives us a competitive edge with contractors," says Cromie. "We are in all major metropolitan areas in 48 states. We find contractors through real estate professionals, we have a field sales force, then we have a functional group in the service operation that seeks them out."

"We have high levels of standards of service. We have to be able to contact the contractor by phone and by fax. They have to maintain certain hours of operation and be willing to work weekends. They have to meet licensing requirements in their state, and they have to meet our standards of quality in their work, their appearance, their hygiene, and their treatment of customers."

"They are independent, so we have a relationship in which we evaluate their performance on a monthly and quarterly basis. We go out and contact 25% of the homeowners who have made a claim every quarter and ask them how the call was handled. Then we provide the feedback to the contractors. The ones with the highest recommendations get the most calls from us."

What percentage of homes are currently protected by home warranties? Ten years ago, nine percent of homes in real estate transactions were protected by home warranties. Today, that number has doubled, according to Cromie.

Are all warranty companies the same? Essentially, they are. Some companies deal only through Realtors, but the costs of the products and the manner in which claims are filed is about the same from company to company.

"We don't run from claims," concludes Cromie, "Some companies are proud that their customers don't have claims. We are proud that our customers do."

Published: December 10, 1998

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.