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Home warranties: Good or good-for-nothing?

What's your home warranty really worth? That depends on the language in the contract and who is standing behind it.

There are two basic types of home warranties.

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  • With a new home, many builders will offer a warranty on the home, usually for about 10 years, to cover the structure. Some builders provide their own warranties; others contract with third-party companies. In either case, the warranty spells out what is covered and outlines a procedure for requesting repairs if something goes wrong.
  • On an existing home, a buyer or seller can purchase a one-year warranty that works almost like an extended service contract. The warranty usually costs $350 to $600 and covers just the electrical and mechanical components of the house, such as the furnace, appliances and air conditioning. If something isn't working, the homeowner calls the warranty company, which dispatches a local contractor. The homeowner pays a minimal fee. If the repair falls under the scope of the warranty, that's the only cost the homeowner has to pay.

Ron Phipps, broker with Phipps Realty in Warwick, R.I., sees one-year warranties as a good value for both buyers and sellers. "The reality is that almost all houses have issues that come up after closing," he says. "For a $35 to $50 service call, it's most advantageous to the buyer to know that someone's taking care of it."

If he wasn't already sold, one incident last year would have convinced him. Two months after one closing, the home's heating system, dishwasher and hot-water heater all broke down. Since the seller had purchased a one-year home warranty contract, the buyer was covered.

"What was nice was that the seller didn't even hear about it," says Phipps.

A warranty is not necessarily blanket protection. And what is actually covered and what a homeowner believes is covered could be very different things.

For instance, a one-year warranty on an existing home may cover problems with the hot-water heater. But it may not cover anything caused by rust or poor maintenance. So if the water heater gives out and the repairman finds rust, you might have to pay the bill yourself.

The key: Read the contract to know exactly what it covers and for how long, what you have to do to make a claim, and what deadlines, if any, you'll face.

New home warranties
With a new home, "The warranty is only as good as the builder," says Janet Ahmad, president of HomeOwners for Better Building, an organization that promotes good home building and consumer-friendly legislation. "There are some good builders who stand behind what they build."

"It's extended protection," says David Crump, director of legal research for the National Association of Home Builders and co-author of "Warranties for Builders and Remodelers."

"A good warranty provides peace of mind. It provides a means of correcting any flaws or defects in construction that otherwise would be the purchaser's sole responsibility."

The most important thing you can do with a home warranty is read it. Before the closing, take a close look at the contract. What does it cover? What does it exclude? How long will the home be covered? What is the procedure if you have a repair problem? What is the timetable for making repairs? What rights, if any, do you give up by signing on the dotted line?

Buyers should "look at the claims procedure and make sure it's something they understand," says Crump. "They should read this and understand how it works -- it's the basis of making their claim."

Next: "If a warranty seems restrictive or unfair, don't sign it."
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