News & Media

There’s a Downside to Offering a Home Warranty

Sellers often think a home warranty offers their buyers some peace of mind. But in a tight market, some buyers will view it as a red flag for potential problems.

NEW YORK – Some sellers hope to hook a buyer by including a one-year home warranty as part of the sale – an offer to cover repair costs for items such as appliances, electricity or plumbing.

They hope the tactic, which is gaining popularity, will give buyers peace of mind – an assurance that they won’t have to shell out cash for pricey improvements after moving into the home.

Seventeen percent of sellers have offered a home warranty as an incentive to potential buyers, according to research from the National Association of Realtors® (NAR). And the longer a home lingers on the market, the more likely a seller will offer a warranty.

The seller often pays for one year of home warranty coverage, which usually ranges above or below $600 for a condo to $700 for a house, The Wall Street Journal reports. Some states even build home warranties into the contract.

“People today are staying in their homes a longer period of time – an average of nine to 10 years,” says Jessica Lautz, NAR’s vice president of demographics and behavioral insights. “If you’ve lived in your home for that amount of time, there may be some systems or appliances that are in need of repair.”

In markets with low inventory, however, a home warranty may actually be a warning sign to potential buyers, says Jeffrey P. Cohen, a professor of finance and real estate at the University of Connecticut School of Business. “If you’re in a market like New York City, I would see it as a red flag that something may come up,” he says.

Cohen said real estate professionals know their specific markets and should be able to advise their customers on whether a home warranty is helpful or necessary.

If buyers opt for a home warranty, Cohen advises not forgoing a home inspection. Inspectors assesses items that aren’t covered by a home warranty, such as the nonmechanical and structural components. That said, problems that turn up in a home inspection will also be considered “pre-existing” and won’t be covered by the home warranty after the deal closes.

“If something is broken, it has to be a complete surprise,” explains Lindsay Katz, a real estate professional with Redfin in Los Angeles. Katz says that if a furnace isn’t working properly during a home inspection, the buyer should either ask for the homeowner to repair it or an allowance separate from the home warranty to cover the cost.

Source: “Home Warranties Offer Buyers Protection. Just Don’t Forget the Inspection,” The Wall Street Journal (Nov. 14, 2019) [Log-in required.]

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