As you look through listings on-line you might notice that some advertise that the home comes with a Home Warranty; and you might wonder, “What is that all about and do I need a warranty on my new home? “

The easiest way to understand this product is to think in terms of other things that you buy in life. Probably the biggest single purchase that most people make, other than a house is their car. If you buy a new car, it comes with a warranty and you expect that. The best warranties say that they cover everything on the car; they are often advertised as bumper-to-bumper warranties. Of course, when you read the fine print you will see that the car makers are careful to exclude all of the items that wear out in normal use – wiper blades, tires, and such. That’s understandable and you are still covered for the larger items – engine, drivetrain and major systems and components. If your car’s air conditioner compressor give out in the first year or two that is usually covered for a repair or replacement. 

The same kind of thing applies to home warranties. They all cover the major systems and items in the home, but there’s also fine print that you must understand. The devil, as they say, is in the details. Below is an explanation of home warranties provided to me by Chris Papinaeu. Chris is the account executive for the Real Estate One Home Warranty program that we provide for our customers. The REO Home Warranty is a private branded offering from HMS National Home Warranty, a leading home warranty company.

"Home warranty" is a marketing term held over from the early history of the industry. In fact, a home warranty is not actually a warranty but a service contract. Generally, a home service contract provides service, repair or replacement on a home’s major systems and appliances, usually for a term of one year.

Basic and optional coverage varies from company to company with some regional variances. Home service contracts are specific and do not include everything in your house, and most do not cover home foundations, walls, structure or finish.

Typical systems that are covered include: interior plumbing, heating system, electrical system, water heater, ductwork, dishwasher, oven, range/cooktop, garbage disposal and garage door opener. Heating and air conditioning systems, refrigerators and washer/dryers may be part of a basic contract or may be options. Spa and pool equipment may also be part of optional coverage.

A home service contract should not be considered a replacement for homeowner's insurance. Where homeowner’s insurance protects the consumer from external forces like storms and fire and theft, home service contracts protect consumers from the unanticipated, and sometimes very expensive

cost of normal wear and tear on systems and appliances in the home. In short, the industry’s services "were born out of the need for household repair that was not in the scope of homeowner insurance."

Repair needs for home appliances and service systems are actually quite predictable. According to the National Association of Realtors®, within the next 12 months, there is a 60 percent chance that a key system in your home, such as the furnace, air conditioner or major appliance will fail, and the cost of the repair will average $900. Sometimes, it can be considerably more than that. For example, according to analysts, HVAC systems "are often some of the most expensive to repair and replace for homeowners and make up one of the primary draws for homeowners purchasing home warranty coverage."

A recent survey by the National Foundation for Credit Counseling showed that a majority of Americans (64 percent) did not have enough cash on hand to handle a $1,000 emergency expense, much less one costing $3,500. Service contracts are not intended to eliminate these household repair expenses but help mitigate them and make them easier to manage. By paying a budgeted annual fee of between $350 and $600, along with a service call charge that usually ranges from $50 to $100 (depending on the area of the country), consumers can avoid the potentially crippling cost of a major system failure. And they are assured access to local plumbers, electricians and other technicians who are licensed and qualified to make the repair.

You may hear some bad things about home warranties, but they are usually being said by people who didn’t understand how to use them or what they covered in the first place. All home warranties require that the policyholder call the home warranty company first when something goes wrong with an item or system that is covered. The home warranty companies all have contracts with local trades groups and will arrange the dispatch of a qualified person to assess the situation ad recommend a course of action. So, if you have a plumbing problem, you can’t just call Fred the Plumber from the phone book; you have to call the warranty company and make a claim report. They will call Fred the Plumber, if that’s who they work with in your area. If you just called Fred yourself, then don’t expect to get reimbursed for his service; that’s not how these things work.

The second thing that you may hear people complain about is the fact that the warranty companies will try to repair an item or system first, rather than just replacing it with something new. If the item or system is too old for spare parts to be available or the warranty company technician determines that it is not worth repairing, then they will replace the item with something of equal functional capabilities. The doesn’t mean that your 20-year old hot water heater that just failed is going to be replaced with the latest and greatest model available today, just one that is of the same size and capability as your old one. It is the warranty company’s call on the brand and model of the replacement. Again, don’t go out and buy a replacement hot water heater at Lowes and expect to get reimbursed. The warranty companies buy their stuff wholesale and they are not going to pay you retail for something that you bought before they could get there.

So, home warranties provide some level of peace of mind, because you don’t have to worry about the things that they cover. You do need to understand what is covered and the rules for using them. They work equally well for homes and condos (remember that you are responsible for everything inside the walls of your condo). Like any other form of insurance, it can seem to be all cost and no return, if you don’t have problems with items that are covered; however, there are plenty of case studies that show the value of them if something goes wrong. I certainly recommend them for all buyers. For an even more detailed discussion about the coverage available and the benefits and costs, contact Chris Papineau at 734-752-0861, if you are in this area or go to www.hmsnational.com.