Read the fine print

Help your clients get the most out of home warranties.

by Ward Lowe   Days after your buyers close on a home, they discover their kitchen sink won’t drain. No problem, they assume, because you, their agent, negotiated the inclusion of a home warranty in the contract.

Your clients call the warranty company and request that a plumber be dispatched to their kitchen–and find out that pipe blockages aren’t covered by their contract. How do they feel about your services now?

It doesn’t matter that you never misled them. It doesn’t matter that the clients chose the warranty provider. It doesn’t matter that the seller’s agent set up the contract with the warranty company. Your credibility–and its referral-generating power–has taken a hit.

Keep your clients from questioning your counsel by showing them ahead of time what to watch out for when choosing a warranty company. Your clients can often avoid costly repairs after the sale closes by using a warranty, but not all defects are covered for the life of the contract, and some exclusions limit the usefulness of the warranty.

There are no guarantees

Popularly referred to as home warranties, residential service contracts offer buyers of existing homes protection against defects not present at the time of the sale. Unlike a true warranty, the service company doesn’t guarantee anything about the home’s current condition, but will repair items that subsequently fail, according to the contract’s provisions.

Don Harvey, vice president in charge of Texas for Best Home Warranty, says a common misconception about a residential service contract is that it covers anything that’s wrong with the house. "They’re not rehab," says Harvey, a member of the TREC Broker Lawyer Committee. "People need to understand that for only $300 a year, the coverage will be limited."

Agents and consumers often misunderstand how contracts work, what they cover, or think the companies try to hide terms of the contract. Harvey admits some of the coverage is limited, but maintains that companies plainly state what they do and do not cover. The real issue is agents and their clients taking the time to review the agreements before they sign them.

"Very few real estate agents or homeowners read the warranty until they have a claim and are denied," asserts Harvey.

Advise your clients to review the length of the contract (usually one year), the appliances and systems covered, and the charge for service visits. According to TREC, these must appear conspicuously in the service contract and constitute the basics of the agreement.

Each company’s contract covers different items; however, when Harvey is asked by agents and consumers what is generally covered by most companies, he always says, "What has not occurred yet."

Aside from pre-exisiting conditions, there are no standard exclusions. But service companies will usually not cover improperly modified or installed items or those that have been damaged by an attempted repair.

To help you better understand service contracts, members of the Texas Warranty Association teach Opportunities and Advantages of Residential Service Contract Disclosures, a course good for three hours MCE credit, two of which are legal. The course is intended to educate agents about service contracts, not promote one company over another. Currently, eight of the 17 residential service companies licensed by TREC belong to the Texas Warranty Association.

"If a warranty is applied properly and used correctly, it is the best investment in the real estate marketplace today," Harvey says.

My agent gave me a home warranty

Using service contracts as an incentive to buy a home became more attractive after the 77th Texas Legislature eliminated the three-day right of rescission on service contracts–thanks in large part to efforts by the Texas Association of REALTORS®. This refund period had allowed a service-contract purchaser three days to cancel the policy.

Under the old rules, an unscrupulous person could take advantage of this loophole by including a service contract as part of a home sale, buying the service contract a day before closing, then canceling the contract right after the closing without the buyers’ knowledge. The new homeowners would learn of the scam only when they called to utilize their service contract, perhaps months later.

While service contracts are often seen as something sellers use to make listings more attractive, anyone can purchase one. Certain parties would have disclosure requirements about such a gift but are not prohibited from buying a service contract.

If your clients bought a particularly expensive home, you could show your gratitude for their business by giving them a service contract as a closing gift. As a listing agent, you might decide to buy the service contract if it would break an impasse in negotiations.

Of course, your buyer clients can purchase their own service contracts. If they intend to do this, advise them to contact the service company soon after closing, because some companies only sell service contracts to owners when the property changes hands. This practice benefits the service company, as most buyers have a home inspected prior to purchase. Presumably, the inspection uncovered any major defects in the property, and pre-existing conditions are not covered by residential service
contracts.

To ensure your clients’ protection, recommend they carefully review any service contract’s terms and discuss any questions with an attorney. Even if your buyers choose not to get a residential service contract for their new home, they’ll appreciate your advice and remember your informed counsel.

Jane B. Author is ... About the author goes here.

Photo © PictureQuest.

home   current issue    top 10    resources 

discussions   contact us   search

Buyers & sellers, visit www.texasrealestate.com.
REALTORS®, visit www.texasrealtors.com.