Solved! What Is a Sellers Home Warranty, and Do I Need One?

Q: Our real estate agent has recommended that we purchase a home warranty for home sellers that would be in effect during the process of selling our home. We thought warranties were to protect the new owners from failing appliances; as the sellers, we know the quirks of our home and the condition of the systems. How do home warranties work for sellers?

A: You’re right—most people do think of home warranties as protection for new owners, and home buyers can certainly purchase a warranty for their new home. However, the period between a home being listed for sale and the closing is a very risky period for the sellers financially. Should something go wrong in the home, the sellers have only two choices: repair it, or reduce the price of the home to accommodate the cost of the repair. Once the home price has been listed, any changes to the price will raise questions about why the home is suddenly worth less, and potential buyers may write off the home as an uncertain option—plus the seller may already have put down a deposit on a new home and may not be able to afford the delays caused by figuring out how to finance a major repair. Home warranty insurance for sellers requires the sellers to pay a premium for a period of coverage in exchange for peace of mind and financial security during this time.

A sellers home warranty can provide financial protection while the house is on the market or under contract.

Homeowners know that things can go wrong in a house at any time—usually at the most inconvenient time possible. Placing a house on the market can sometimes seem like an invitation for the pipes to start leaking, the outlet in the kitchen to blow, or the sump pump in the basement to fail. Sellers are often on a tight budget; having completed obvious repairs and maintenance work before listing and strung between buying one home and selling another, cash may be scarce, so a major repair to a sudden plumbing or electrical issue may cost more money than the seller has available. How does a home warranty work for sellers? With a policy in place, the seller can call for repair knowing that they’ll pay only the pre-contracted service charge to get the repair done quickly and well. Without a warranty, the seller may have to delay the repair while they find a way to finance it, missing showings and open houses while the home is awaiting and undergoing repair. If the maintenance problem happens while the home is under contract, a prompt repair can be the difference between shrugging and apologizing for a brief delay and losing the deal completely.

If the buyer’s home inspection finds issues with systems or appliances that require repair, they may be covered by the sellers home warranty.

The home inspection is one of the most stressful parts of buying or selling a house. Even owners who have meticulously maintained their home worry about the unseen problems lurking behind walls, in the dark corners of the basement, and in the soft wood near the gutter. Sometimes an inspector returns an overall clean bill of health, suggesting the replacement of a few outlets or cables, while other reports are the fuel for an extended series of negotiations. What will the seller repair? What will the buyer agree to take on in exchange for a credit on the price? In these cases, sellers home warranty coverage may allow the seller to generously offer to repair problems that fall under the home warranty’s coverage without coughing up a lot of out-of-pocket cash. This places the seller in a strong position; by agreeing to repair the problems that are covered, they may be able to negotiate with the buyer to cover the problems that aren’t included in the policy and save themselves stress and money. It’s likely that the warranty won’t cover everything on the inspector’s list, but knowing that the systems and appliances are likely covered can reduce the stress of the inspection process for the seller and save a significant amount of money.

Home warranty companies may offer the seller free or discounted coverage if they agree to purchase coverage for the home buyer.

As an incentive to sellers to purchase warranty coverage, the best home warranty companies offer coverage at a significant discount (or even for free) during the sale process if the seller makes a yearlong home warranty policy a part of the home sale. These companies allow the warranty to transfer from the seller to the buyer at the closing of the sale, minimizing the home warranty cost to sellers. This is a great opportunity for the seller: They’ll be covered during the sale process and can add a home warranty to their listing as a draw for buyers. What is a home warranty for buyers? If offered a home warranty when buying a house, the buyer will have a yearlong service contract with the warranty company on all of the systems and appliances listed in the policy documents. If a covered system or appliance breaks down or fails, the buyer can call the warranty company for service, only paying the service charge listed in the policy. Particularly for an older home, the offer of a free home warranty may make the difference for a tentative buyer; first-time home buyers are sometimes leery of older homes because they’re afraid they’ll require significant repair shortly after purchase, and a home warranty included with the sale can set their minds at ease, knowing they can more easily budget for any necessary repairs.

A home warranty isn’t the same as homeowners insurance, but the two can work together to more fully cover the seller’s assets.

Won’t homeowners insurance protect the seller from disasters? In the case of a fire or hurricane, yes, but against slowly leaking pipes and failed air conditioning units, no. Home warranties are service contracts for appliances and whole-home systems, so they cover the repair of failures caused by age and normal wear and tear, but they do not cover the damage caused by the failure. Homeowners insurance, on the other hand, specifically excludes age-related failures: It won’t pay to repair the source of a burst pipe or fire, but it will cover the damage that results. Together, homeowners insurance and home warranties create an envelope of financial protection around a home.

It’s important to read the entire sellers home warranty policy carefully to understand what’s covered and what isn’t.

How does home warranty work get covered? The policyholder needs to have a clear understanding of what is included in the policy, know the service call fee, and understand the policy maximums to use the policy to their best advantage. Home warranties are policies of inclusion. What this means is that the policy documents will spell out precisely what is covered. If a system, appliance, or condition is not listed in the policy, it’s not covered—it’s as simple as that. Therefore, it is critical that sellers read the documents very, very carefully, especially if they plan to offer to transfer the warranty to the buyers. Not all policies permit transfers, so if a seller intends to do so and has purchased a policy that can’t be transferred, they’ll have spent extra money on a policy they can’t use and will have to purchase a second policy for the buyers. Often homeowners assume that all systems and appliances are covered, when often home warranties don’t include items such as well pumps and septic systems or the second fridge in the garage. Usually when homeowners are dissatisfied with their home warranty it’s because something they thought would be covered was not included in the policy. A careful, thorough reading of the policy can prevent this kind of misunderstanding.

A home warranty can be enticing for buyers while also providing protection for the seller.

All sellers were once first-time buyers and can appreciate the anticipation and anxiety that goes into purchasing a home without a real understanding of the unexpected costs and repairs that can crop up. More and more buyers are asking sellers for home warranty coverage, so offering a home warranty to buyers can make a listing jump up to the top of a buyer’s list or draw out an offer on a home that might not have some of the features that the buyer is looking for—the promise of a financial cushion can be that enticing. Meanwhile, the seller can rest more easily knowing that if a sudden system failure causes a major leak or the oven quits working the night before the open house, they’re protected and won’t have to scramble to find money to make repairs or purchase a replacement. The best home warranty for sellers will benefit everyone involved in the home selling and buying process.