Home warranties: Good or good-for-nothing?
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."... If you see stipulations in the warranty that bother you, like mandatory binding arbitration or a liability limitation clause, alter the contract, says Ahmad. "Strike them out. Say, 'Do you have a problem with that? Why do we need a limiting warranty that limits the builder liability?'" The bottom line, says Ahmad, if a warranty seems restrictive or unfair, don't sign it. "I think consumers need to say, 'No, I'm not accepting your warranty.'"
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.
- 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."
"They should read the extent of their coverage so they know what is covered and what is not," he says. "A warranty is not necessarily going to provide them with a perfect product. A warranty is going to provide them with product that is acceptable under certain professional construction industry standards or guidelines," he says.
Get a copy in advance of your closing and go through it step by step. If there is anything you don't understand, call your attorney or the closing attorney and get a thorough explanation.
Questions to ask:
- Will you deal directly with the builder or do you now have to go through a third party?
- Do you retain the right to sue if there are significant problems or are you giving up that right in favor of binding arbitration?
- Does the contract limit the builder's liability if there is a problem?
Too many times, buyers don't see the warranty until closing and have no idea what's in it, says Nancy Seats, president of Homeowners Against Deficient Dwellings, a grassroots consumer advocacy group. And many of the contracts are "written in legalese," she says.
Her advice: "Read the exclusions very carefully and really think about the implications of those exclusions."
A mandatory binding arbitration clause is included in many warranty contracts and is an important point to consider.
Builders say it's a great way to limit court time and costs. "It's a better way of getting matters resolved," says Crump. "It cuts to the chase and does so less expensively and more expeditiously."
But some consumer advocates believe the arbitration process favors the builders, especially if the builder regularly uses the same arbitration service and names a specific arbitration company in the contract.
"You do not want an arbitration service that gets repeat business from your adversary," says Calvin "Kelly" Vance, a Spokane, Wash.-based lawyer who specializes in construction defect and real estate cases.
Other points to note are appliance replacement clauses and liability-limitation clauses that limit the amount you can collect if there's a problem.
Many appliance replacement clauses state that if the appliance cannot be repaired the company will replace it at little or no cost to the homeowner. The problem there comes in an interpretation of what "unrepairable" means. Is your washing machine considered repairable if an obsolete part from Taiwan is needed and it may take six months to come in? It can be costly to leave this open-ended. Ask the company to explain in writing the criteria for determining if something cannot be repaired before you sign.
If you see stipulations in the warranty that bother you, like mandatory binding arbitration or a liability limitation clause, alter the contract, says Ahmad. "Strike them out. Say, 'Do you have a problem with that? Why do we need a limiting warranty that limits the builder liability?'"
The bottom line, says Ahmad, if a warranty seems restrictive or unfair, don't sign it. "I think consumers need to say, 'No, I'm not accepting your warranty.'"
Resale home warranties
As with a new home warranty, you want to read the policy on a one-year warranty and understand what's covered and what may be excluded. Usually, one-year warranties cover the "moving parts" of a home, like appliances, heaters and air conditioners, and do not include conditions caused by poor construction or bad maintenance.
"It's really just a service contract," says Jim Hood, editor in chief of ConsumerAffairs.com, a news and advocacy site.
Hood says he sees a number of complaints on one-year warranties. Some of the most common: long response times and claims by repair people that the fixes aren't covered under the contract. As a result, he says, "The homeowner ends up spending a lot of time and trouble calling, trying to get someone to do something."
But others see value in the service, especially for buyers who've already sunk every spare dollar into the house.
"I think they are very important to have, as long as it's a reliable company," says Ahmad.
Phipps says he's noticed that his agency spends a lot less time following up with minor repairs than before they started recommending the warranties to sellers. "Now with the program, it's delightful," he says.
"And if the seller doesn't pay for it, I recommend the buyer get it," Phipps says.
If you're considering one, first research the warranty company. How will they select the people they send to your home? And what's their track record? Check out the company with other homeowners, the state and any local or national consumer groups.
Are there complaints or pending actions? What are current and past customers saying about the company? If you have doubts, consider taking out a service contract for your heating or air conditioning with a local company that will actually perform the service, says Hood. Another alternative: Put some cash aside specifically for home repairs.
A little self-reliance
If there's a home in your future, and it comes with a warranty, do your own research before you sign. What, if anything, can you find out about the warranty company or the builder when it comes to being responsive to repairs? A quick Internet search can let you know if the warranty company or builder is dogged by complaints or if customers are satisfied. If the company has other customers in your immediate neighborhood -- such as in a condo or town-house complex -- see if they would buy or renew a contract with that firm.
With a new home, talk to other homeowners in the subdivision about the builder's warranty. If you're buying an existing home, get a few references from the warranty company or your real estate agent.
What you want to know: Are owners satisfied with the warranty or have they had problems with it? Is the home holding up well and does the builder, or the warranty company, stand behind the product? Is it fairly easy to get repairs completed? Are repairs done well, and is there a fairly quick response time? Are most things covered or are there a lot of out-of-pocket costs? Did the homeowner have to jump through any hoops to prove that the item was protected under the warranty?
In addition, "Many builders offer a warranty on their own, not as part of a commercial warranty process," says Crump. "The builder will replace or repair defective components in a stated period of time. There are lots of good reasons to do that, and buyers can also look for that."
Dana Dratch is a freelance writer based in Atlanta.