CONSUMERS : New Owner’s Jitters? More Turn to Home Warranties

If you’re buying or selling a home this year, you might feel more secure if the house were covered by a home warranty, a one-year plan that covers mechanical things that could break down just after you’ve bought or sold it.

With a warranty plan that will cost between $245-$295, for example, you might save $3,500 on a furnace bill, $1,400 for repair of an oven/stove or $375 for a new water heater.

Almost unheard of a few years ago, home warranty plans are becoming increasingly popular with buyers and sellers across the country. And some companies will renew the warranty on a year-by-year basis after the initial plan expires.

Californians are tuning in on the warranty plans in a big way, too. During the first two quarters of 1988, almost 42% of the homes being sold in the state were covered by a home warranty, according to statistics from the Santa Monica-based Home Warranty Assn. of California (HWAC), established in 1985.

About 110,000 home warranty contracts, valued at $32.6 million, were sold in the state through June of last year. That’s a 24% increase over the number sold during the same period in 1987.

“I definitely advocate them to a lot of my clients,” Long Beach realtor Peter Lowes said. “Whether they’re buying residential or income property, it gives them peace of mind for at least 12 months for a deductible of $35 to $50. And the policy itself averages about $245 for a single-family residence. For an extra $110, you can get the spa or pool covered, too.”

Optional Add-Ons

Depending upon the warranty company, you may also get the air conditioner, washer and dryer or pool heater covered by warranty for an added fee.

“It’s just additional protection and benefit to the seller or buyer,” Lowes added. “Either the seller or buyer can purchase the warranty, or they can do it 50-50. Or realtors can purchase one as a negotiating tool for the home they’re selling or as a closing present to the buyer. But people should absolutely read the fine print of the policy to make sure they know what’s being covered.”

For one thing, don’t confuse a home warranty plan with homeowner’s insurance. Home warranties mostly cover problems with a home’s heating and cooling systems, plumbing, electrical and appliances--such as water heaters, stoves, ovens, dishwashers and disposals. If you’ve got water damage from a leaky roof or had a fire, theft or vandalism, a home warranty doesn’t help you. You’ll have to check with your homeowner’s insurance.

“They certainly have a place in the market, but I don’t think they’re for everybody,” said Mary Jane Ludwig, a realtor with Fred Sands/Marina del Rey. “I’ve used them a couple of times with clients purchasing on a shoestring. Financially, they’ve plunked down every dime to buy the house, and if an emergency would come up, they wouldn’t have the extra cash to pay for it. But people who are fairly affluent aren’t going to get involved in that.”

Ludwig said that she apprises her clients of the availability of home warranties, and gives them literature about them. But she doesn’t personally recommend any specific company.

There are about 10 companies in California that sell home warranties; six are members of the Home Warranty Assn. of California. But all are regulated by the California Department of Insurance.

According to an association spokeswoman, an average of 1.2 claims were paid on each home warranty contract sold in California in 1987, “significantly higher than the average number of claims per policy paid by other industries regulated by the state insurance department.” Claims can range from a simple repair to replacement of a major appliance.

Agent’s Protection

The firms that sell warranty plans in Southern California are American Home Shield, the state’s largest company, based in Santa Rosa; First American Home Buyers Protection Co. in Van Nuys; Buyers Home Warranty Co. in Burbank, and Old Republic Home Protection Co. in Irvine.

“I’ve had pros and cons from clients (about home warranty plans),” Ludwig said. “One customer in particular felt there was so much in the fine print in terms of exclusions that the policy wasn’t very helpful. But on the other hand, if you’re talking on the basis of a water heater or furnace breaking down, a warranty can save you money. Some agents have been using them for fear of lawsuits--people who just sue at the drop of a hat--or for extra caution. But I think they are mostly for people, buyers and sellers, who want to take a conservative approach.”

If you’re considering taking out a home warranty plan, you should do some comparison shopping. One company may cover stoppages in drain lines; another may not. So you should make a detailed inquiry about every item that will be included in your warranty.

The companies that issue home warranties do not do inspections, but issue coverage on the basis of the written disclosures and home inspections that are standard practice in home resale transactions.

Thus, if the seller is dishonest about something in the house, the home warranty company generally will not repair it if it is found to be a pre-existing condition or if it is an item that was broken before the policy went into effect.

Repairs, Not Upgrades

“A warranty company will not upgrade bootlegged wiring in your house,” said Phil Branson, president of First American Home Buyers Protection Co. and a former president of HWAC. “We’re in the problem business and we fix things, but we’re not in the fixer-upper business.”

And according to Branson, industry statistics show that “it’s during that first year (of ownership) that things really go wrong.”

California home warranty companies offer their clients a toll-free telephone number to call for repair service. The company will send a repairman to service the item or replace it. The client pays the standard deductible of $35 to $50. The companies also offer 24-hour emergency service for homeowners with warranty plans.

“This (warranty plans) helps realtors, too, because they don’t get the phone call that something is wrong at the house. We do,” Branson explained. “And it gives the consumer a company to talk with if there is a problem. If they’re not satisfied with the work that’s been done and they don’t get results from talking with the company, they can then go to the Consumer Affairs department of the Department of Insurance. It’s really an added protection for the consumer.”

Hire Inspector

Branson said his advice to people buying homes is to get their own inspector in addition to the one the seller has employed to survey the home. “Have him check the structural integrity of the house before you buy it,” he said. “Whatever the cost of the house is, it’s worth it to spend a few hundred dollars on your own inspector.

“Then walk through the house prior to the close of escrow and run all these things--start the garbage disposal, the furnace, the dishwasher,” Branson continued. “Test all the systems. I tell people they shouldn’t be shy. They’re the ones buying the house. Then insist on a warranty. If you make all that little added effort, you’ve protected yourself as well as you can.”