What Is a Home Warranty and When Do I Need One?

Reader question: “We are planning to sell our home in the spring, and I’ve been talking to a Realtor friend of mine about it. He said we might need to buy a home warranty as an added ‘perk’ for the buyer, since it is such a slow real estate market right now. I’m not exactly clear on what these warranties cover. What is a home warranty, and do I really need one to sell my house?”

Personally, I’ve never agreed with the idea of buying a warranty when selling a home. If you price your house effectively based on the true market value, you should be able to sell it despite the slow market. Home staging goes a long way too, so don’t neglect that.

But I don’t think it’s necessary to take on the extra expense of a home warranty. If the buyers want extra protection for the hot water heater and A/C unit, they can easily buy it for themselves. I would make an exception to this statement for older homes, though. There are situations where a warranty might help you sell an older property with appliances beyond their life expectancy. We will discuss this more later.

I have never seen a real estate deal fall through because the seller refused to buy a home warranty for the buyer. Transactions typically fall through because the buyer and seller cannot agree upon a price, or because the buyer’s financing has fallen through. But the warranty issue rarely sets the train off the track. These are my observations anyway. Take them for what they’re worth.

Will a House With a Warranty Sell Faster?

According to the National Home Warranty Association, properties that have a home warranty plan in place sell quicker than those that do not have coverage. They report that homes with protection plans sell approximately 50% faster. I’m only telling you this because you might stumble across this “statistic.”

I dispute this claim for two reasons. First, I have never seen the data to support such a claim. And after all, the organization reporting the statistic represents home warranty companies. So they naturally want you to lean toward buying a warranty. (I will gladly amend this statement if they send me the details of their study. But I’m not holding my breath.)

Secondly, home sales generally have more to do with price and condition than whether or not a home warranty is being offered. Like I said, I’ve never heard of a deal falling through because the seller did not have a home warranty plan for the buyer. Has it happened before? It’s possible. I’m just saying I’ve never heard of such a thing.

Before we go any further, let me explain what a home warranty is and how it works. This will help you decide if you really need one when selling your home — or any other time, for that matter.

What Are Home Warranties Anyway?

A home warranty is basically a protection plan that covers certain installed systems within your home. You can think of it as a form of insurance against electrical, mechanical or plumbing failures. In most cases, the home warranty company will have an existing relationship with various contractors. They will use these contractors to replace or repair any failed item that is covered by the protection plan.

Items that are typically covered by a home warranty include:

  • Hot water heaters
  • Installed plumbing system
  • Installed electrical system
  • Heating and air-conditioning / HVAC units
  • Built-in appliances like garbage disposals, ovens, etc.

The last line item on this list may require additional coverage (and cost). Most home warranties cover the first four items on this list. Some have different levels of protection and may also include repair or replacement of refrigerators, dishwashers, washer and dryer, etc. So be sure to compare the cost versus the coverage before you make a decision.

The Service Call Fee / Deductible

Like other forms of insurance, you’ll probably have some type of deductible on your home warranty plan. The deductible is the amount you have to pay toward a repair or replacement before the warranty company will cover the rest. It might actually be called a “deductible,” or the company might refer to it as a “service call fee.”

If you decide to purchase a home warranty plan for your house, you need to know what kind of out-of-pocket expense you might encounter. For example, let’s say you have a warranty with a deductible / service call fee of $100. Your air conditioning unit breaks down and the repair work is estimated to be $500. Under your agreement with the home warranty company, you would have to pay the first $100 of this repair cost, and the warranty company would cover the remaining $400.

I used $100 in this example just to make the math easier. In reality, the service call fee usually ranges from $35 – $50. Some home warranties will have higher fees / deductibles, but they are generally less than $100. Just make sure you read the fine print so you understand the costs and coverage that are involved.

Generally speaking, a home warranty plan will last for one year. You can expect to pay anywhere from $300 – $400 for a year’s coverage, depending on the size of your home and the number of installed appliances. That’s the average cost of a protection plan for a moderately sized home.

This brings us to the subject of cost versus benefits. If the items in your home are fairly new, it probably won’t make sense to take on the added expense of a home warranty. But if most or all of the appliances are near the end of their lifespan, you might be able to justify the cost.

Remember, you will have to pay an annual premium for your home warranty plan. This is the annual cost of protection. In addition, you will probably have a deductible or service fee as we discussed. So you need to weigh the cost of the warranty against the potential cost of repairs over the next few years.

Beware of Exclusions in Your Protection Plan

If you decide you need a home warranty, you should be on the lookout for exclusions. An exclusion is an item that will not be protected under your warranty plan. Common exclusions include the following:

  • Damage to appliances that is the direct result of neglect or lack of maintenance. As you would imagine, this is difficult to prove. How does the home warranty company know if you’ve neglected an appliance? Typically, this exclusion will only be used if there were obvious signs of neglect.
  • Improper installation of appliances can also lead to an exclusion in your warranty coverage. For example, if you made mistakes installing your dishwasher on your own, and now it doesn’t work properly, the warranty company may refuse to cover it. Again, it comes down to whether or not they can prove that a faulty installation occurred.
  • Pre-existing conditions. You’re probably familiar with this term from the health insurance world. Your home warranty will only cover damage or dysfunction that occurs after the date of coverage. Here again, this is a hard thing to prove. But you need to be aware of this exclusion before purchasing a protection plan.

The home warranty company you choose may have additional exclusions, above and beyond those listed above. So make sure you read the fine print regarding the different types of appliances they cover, and also regarding any exclusions they have. You also want to make sure you understand the service fee / deductible that we talked about earlier.

Lastly, I would recommend that you take a good look at your current homeowners insurance policy. You may have coverage for some of the items that are typically included in a home warranty protection plan. If so, it probably wouldn’t make sense to take on the added cost of the warranty. I know you’re approaching this from a seller’s perspective, with the short-term goal of selling the house. But I need to mention these things for the benefit of other readers.

Conclusion and Summary

Do you really need a home warranty when selling your house, or any other time? It really comes down to the age and condition of your appliances. If you have a lot of old appliances and systems that are no longer covered by a manufacturer’s warranty, you may be able to justify the added expense of a home warranty plan.

Likewise, if your appliances are well beyond their expected lifespan, you might enjoy the peace of mind that this kind of protection brings. Just make sure you read the fine print within the warranty, and that you understand what types of service fees and exclusions it contains.

As far as buying a home warranty just to sell the house, I don’t think it’s necessary in most cases. Granted, there are situations where it might make be a smart move. If you’re having trouble selling your home because it’s old (and so are the appliances within it), buying a home warranty could very well be the tipping point. It might make buyers feel better about making an offer.

But again, I have a hard time believing someone would walk away from the ideal home just because it lacks a warranty. It definitely requires some additional thought on your part.