Okay, so here in Memphis I have seen at least a few realtors encouraging their buyers to all purchase home warranties to help cover repairs and for "peace of mind". I am in the process of searching for my first home and, while my realtor and I haven't had the home warranty discussion, I am prepared for the day when she probably suggests to me that I should purchase a home warranty (probably from a specific local agent).
I don't claim to know the ins and outs of home warranties but I don't think that I really need to become an expert on home warranties or real estate to know that a home warranty is a bad investment and a waste of money, much like pretty much every other warranty\extended warranty offering out there (car, cell phone, television, computer and every other purchase you could imagine). In every case the companies that are offering the warranties have done extensive work to crunch the numbers and ensure that they are winning (ie taking in more in monthly premiums than they ever payout in warranty claims) the vast majority of the time, as they wouldn't even begin to offer these products if they weren't making a healthy profit and winning the vast majority of these deals. Sure, I imagine every so often (maybe 10 percent of the time) someone lucks out and ends up receiving more in service payouts from the warranty company than they paid in via premiums over the life of the agreement but I am sure that those are fairly rare.
Does anyone care to argue in favor of home warranties? Someone please try to make a reasoned argument why I should consider taking the advice of some of the agents in my area and actually consider purchasing a home warranty.
The 2nd part of my question is this: it has been suggested (ie article below) that some realtor are receiving kickbacks\payments from home mortgage companies for referring homebuyers to them. Is that really common in the real estate industry? I would assume so, as that is the only reason that I can imagine that some agents want to steer their clients towards getting a home warranty, as the RE agents have to know that mathematically that home warranties are bad deals the vast majority of the time. Can anyone provide some insight into this part of the business?
I bought one for the first year of owning a home. I figured if something major breaks I'll deal with it through the warranty co. Our stove broke. They offered us a piece of crap 300 stove or $450 buy out. I took the buy out. The warranty cost $500.
I just got the renewal. $879 dollars with a AC warranty. I shredded it. After the first year I'm not wasting money on that. I rather pay $900 to my principal.
While there is the possibility that some agents get kickbacks from vendors that they recommend (this could be true in any industry), I do not believe that it is at all widespread. I cannot imagine any agent risking their career or their license for the few measly dollars that a home warranty rep could offer.
I think the real reason that agents encourage home warranties is because most resale buyers that encounter problems after closing call the agent to complain. Imagine buying a $300K house and two weeks after moving in the the hot water heater goes out or a toilet begins to leak. These kinds of things are common occurrences to homeowners. But when they happen shortly after purchase you feel as if you bought a lemon. Having the home warranty is a way to alleviate the fear of problems. A home warranty is simply an insurance plan, so they adopt a "Don't worry your covered" mindset.
I personally am not a fan of home warranties. I believe that you are merely paying upfront for the repairs. Yet at the same time for some people they are not only practical but worth the money. If you are the kind of person that is going to call a repair person to change a light bulb (yes I know people like that) then a warranty may work. If you are someone that can handle simple repairs then take the money you would have spent on the warranty, put it in the bank and use it when something major comes along.
I'm surprised the realtor mentioned warranties to a buyer. Usually sellers spring for them to make a house look more appealing to a less informed buyer. More informed buyers know how useless home warranties are.
Doesn't matter who profits from selling these things (besides the insurance company). A warranty user can expect quibbles about what is covered, poor response times, and cheap repairs. Some come out ahead on warranties and some win the lottery. Most don't.
Don't buy at your maximum limit, set aside some savings for the unexpected, and use your (usually paid-off monthly) credit cards for a real emergency.
I usually put in the offer that seller pays for the warranty. Here, we cannot take kickbacks/referral fees to mortgage companies. I've had several clients save thousands on home repairs because of the warranty. MIL's house had a gas leak, and a pipe break under her slab, damaging the wood floors. Warranty paid out about 2300. In repairs.
Another client had water htr fail and leak while they were on vacation. Paid out about 1200.00.
We've had the SELLER pay for a home warranty all three times we've bought. On our fourth buy and requested again. We're also offering a home warranty as sellers, just as we did the second time (but not the first). This is because most of the homes we've bought were over ten years old with at least a few systems or appliances that were original or close to it.
Older systems and appliances are going to wear out, especially in this day and age. I'm 34, not a doddering "back in my day" type, but I can tell you all those complaints about modern-built mechanicals and appliances falling apart after a few years is very much true. My theory (and that of repairmen I've talked to) is that it's so you'll spend extra money on replacement parts or a new unit. And replacement parts are EXPENSIVE. We're out of home warranty right now (first time we didn't keep it for more than four years), and we're kicking ourselves. Just had the control panel or touchpad for double wall ovens go out. The serial number has worn off, so the repairman can't guarantee that the $600 touch pad or the $700 control unit would work. We're ending up paying for new wall ovens, $1889. When we had a warranty, it was $450 per year with a $60 deductible. And they do an 80% cashout for replacement. So we'd be out much less money if we had kept it another year or so.
The pro on a home warranty is really that they will keep older systems ticking long enough to save up to be able to afford the replacement if you're wanting nicer than the replacement quality they're going to provide. That's especially important with HVAC, where the units can cost multiple thousands of dollars to replace.
The con is that yes, you're paying insurance in a sense, paying against the chance of something breaking. But I'll tell you after three houses we have yet to NOT get our money's worth. House 1, furnace repair costing $50 for us, $700 for the company. Water heater replacement, $600. House 2, A/C repairs that would have cost $1,000 (not even replacement, but several trips over three years to find a leak)), refrigerator repairs at $200 and then replacement after it finally conked, $800 cash out that we used towards $1200 new, $400 cash out for dishwasherthat we used for $600 new. House 3, A/C issues again, $700 and we paid $60. This is the house with the ovens, and man do I wish we had kept it!
American Home Shield has done well by us, in two different states, and I've never seen the yearly rate go over $500.
ETA: Our current house that we're buying, the gas furnace is original to the 21-year-old house and will be over $6,000 to replace if the Internet estimate sites are to be believed. So I think we'll get our money's worth this time, too.
Home warranty kickbacks used to be very common.
It was sad how agents would argue that they should be the one to provide the warranty, demand that the buyer have a warranty, etc., over a lousy $40--$80 kickback.
Some firms pushed their agents to provide the warranty from specific companies with whom the firm had a kickback arrangement, and the agent then got half the kickback after messing with everyone in the transaction.
RESPA has taken care of that, pretty much.
It is still in our client agreements that we have to stipulate how much of a kickback we get from warranty companies.
Warranties themselves are neither as good or as bad as people say.
They have their place for some homeowners.
Another reason many agents push them is to avoid liability for repairs.
Homeowner: "You didn't offer us a home warranty. How about you pay for this water heater?"
Though it's negotiable, the Texas contract is written for a seller to purchase the home warranty for the buyer, not the buyer buying one. It's so the buyer doesn't call the seller or agents a week after move-in and complain the AC/dishwasher/waterheater/etc broke. Since the buyer gets to pick what company, we put a cap on it so the buyer can't add a bunch of add-ons, usually $500, unless there's a pool then most charge about $150 extra for that.
I don't receive kickbacks. Back in the early 2000's, there was a company that would give about $20 for each policy. $20 doesn't make or break the bank. There is no point in pushing a policy company for chump change.
I don't currently know any agents receiving incentives for home warranties. There are some big brokerages who get incentives if their agents push a company, but when it doesn't trickle down to the agent, no one cares.
I'm not sure if any warranty companies are still paying agents. There used to be one prominent warranty company that did but I think they may have even dropped that program. Even then it was only like $35 so it wasn't much.
Aside from that, are warranties worth it? It's like any other insurance - if you use it then it's worth it. If you don't use you could have saved the money. Does the home have an old HVAC or water heater? If so that may be a good one to have it on. Is the home 1 year old? If so probably not so important.
My agent purchased the warranty for me when I bought my first home. My house was below street level and the sewage ejector pump failed. It wasn't covered because it wasn't IN the house. So, basically, it was worthless.
My recent purchased, I had to sign whether I wanted one or not and I said no, they are worthless. My agent (different one) completely agreed.