Diminishing Returns?

Is a two-year home warranty better than one year?

If you weren’t aware, home warranties are fast on their way to becoming a standard feature of residential real estate transactions, at least in Minnesota.

The standard Minnesota Purchase Agreement now includes “opt-out” language, making it much more likely that the parties to the transaction will select a home warranty by default.  See, “Housing Trends 2011.”

Such home warranties have long been popular for upper bracket homes, as well as for homes that have still-functioning — but very dated — mechanical’s (heating, plumbing, electric, etc.)

Whereas only a few companies underwrote such coverage until a few years ago, now many do, typically covering the home’s HVAC and major appliances for $30 – $40 a month, or about $400 annually (it’s also a good idea to cover the main drain clean-out). 

Who Pays?

Which leaves the question, who pays for the warranty, and for how long?

In many cases, the Seller pays for it as part of their marketing.

Not only does having the warranty in place give the prospective Buyer piece of mind, but it also relieves a big potential worry for the Seller, who can elect to start coverage while their home’s for sale.

That’s even though the premium isn’t due until closing, when it’s subtracted from the sales proceeds.

What if something breaks while the home is on the market, but it ultimately doesn’t sell? 

Believe it or not, at least with some insurers, the claim will still be covered, and the homeowner won’t have to pay the premium!  (who says there’s no free lunch?!?)

Resolving the Inspection Contingency

In other cases, the Seller ends up buying a home warranty following the Buyer’s home inspection.

Especially when the inspection raises yellow — but not red — flags about the future lifespan of the furnace or various appliances, a one-year home warranty — paid by the Seller — is a good compromise that addresses both parties’ goals.

Regardless of who pays the first year premium, most policies allow the new homeowner to continue coverage in subsequent years.

2 Years > 1 Year?

Which begs the question:  if a one year, seller-paid home warranty is good, is two years even better?

In fact, I’m now starting to see a few listed homes offering just such an enticement.

While I certainly understand the appeal, my gut reaction is that that may actually be counter-productive, depending on the home.

Especially where overall condition is an issue, purchasing an especially long warranty for the Buyer may only serve to put a spotlight on that concern.

P.S.:  I know what Fed Chairman Ben Bernanke would do if he were selling his home:  buy a home warranty effective through 2027.   🙂

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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