September 14, 2010 in Real Estate

When your 20-year-old refrigerator springs a leak, what do you do? Your first instinct may be to decide between a costly repair and an even costlier replacement.

But if you have a home warranty policy, a repair could be free.

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Home warranty policies are a perk of many home purchases. They cover repairs on specific home elements, such as built-in appliances, heating and air conditioning systems, and plumbing.

“A home warranty contract promises to keep working items working for a certain time period, usually one year,” says Carl Knighten, CEO of HMS Tri-Region, a 30-year-old home warranty company based in Fairfax, Va.

Learn the details

Two types of home warranties are available:

  • Homebuilder warranties on newly built homes. The cost of the warranty is included in the price of the home. Builder warranty policies typically cover up to 10 years of structural defects; one year of coverage on items such as stucco, drywall and paint; and two years of coverage on HVAC, plumbing and electrical systems. Appliances are typically covered for about six months.
  • Home warranty company polices for existing homes. Companies also sell policies to purchasers of existing homes. In most cases, a home seller or real estate agent pays for these policies — which typically cost a few hundred dollars — as part of the sale of the home. These policies usually cover one year of repairs on various appliances in the home, along with its furnace, air conditioning and plumbing.

Many home warranty policies have a deductible of around $100 or the cost of a repair, whichever is less. The deductible applies to each repair that occurs.

Home warranty policies also are available directly to homeowners and homebuyers, who may purchase them in certain circumstances — such as after buying a foreclosure, Knighten says.

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“Banks do not typically pay for a home warranty on a foreclosure or short sale, so homebuyers can purchase one for these homes if they wish,” he says.

However, Knighten says that less than 1 percent of his business comes directly from homeowners.

Home warranty criticisms

Although home warranty policies would appear to offer peace of mind, some people have misguided expectations about what a home warranty policy will cover, says Angie Hicks, founder of Angie’s List, an online review site with more than one million members that provides tips and consumer reviews on contractors and other businesses.

Home warranties only promise to keep home elements functioning, not to provide homeowners with new appliances. Nonetheless, Hicks says consumers get frustrated because they cannot make decisions about whether to repair or replace an item, or about the service providers who do the work.

“Home warranty policies have topped the list of most-complained-about categories for the past five years on Angie’s List,” Hicks says. “The complaints are usually because consumers don’t understand what’s covered in the policy.”

Hicks says that because new homes rarely require repairs, complaints generally center on home warranty policies on existing homes.

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“Our members complain about the lack of control over the subcontractors sent to do the work and their recommendations,” she says.

However, Knighten disagrees with the criticisms leveled at home warranty programs. He says consumers need to realize that they get what they pay for.

“Most home warranties cost about $400 and are covering about $20,000 worth of items such as the HVAC, appliances, electrical systems and plumbing,” Knighten says. “Consumers need to be realistic and understand that they are paying for the peace of mind of knowing that repairs will be made when needed. They cannot expect a home warranty that costs $400 to pay for a new $6,000 heat pump if it can be repaired so that it works again.”

Getting the most

Hicks acknowledges that home warranty policies can provide real benefits for some homeowners.

“Some home warranty policies can work out well, especially if someone has purchased an older home,” Hicks says.

So, how can you make sure these policies work for you?

Knighten says consumers should have realistic expectations of a home warranty policy.

“A lot of people expect a warranty to replace their appliances or to repair things that were never working,” says Knighten. “Consumers need to understand what the policy covers and what it doesn’t.”

Knighten recommends home sellers and real estate agents look for a home warranty company with a long-term history in their area and compare different programs for coverage levels and deductibles.

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