Six things you didn’t know about residential service contracts

Residential service contracts—also called “home warranties”—have become a common part of many real estate transactions. Before you encourage your sellers to offer one as part of the sale or advise your buyers to purchase one, here are a few things you may not know about residential service contracts.

1. Pre-existing conditions are not covered. Residential service contracts don’t cover defects present at the time of the contract’s purchase. If your buyer’s inspector finds a leak in the roof, make sure you tell your client that the residential service contract included by the seller won’t pay to have it fixed.

2. Homeowners shouldn’t try to fix covered items. Most service companies won’t cover improperly modified or installed items or those that have been damaged by an attempted repair.

3. Residential service companies are regulated in Texas. Under Chapter 1303 of the Texas Occupations Code, the Texas Real Estate Commission licenses and regulates companies that offer residential service contracts in the state. A current list of companies licensed to do business in Texas may be found at www.trec.state.tx.us/licenses/rsc_licensed.asp. Home warranties on new construction, however, are usually handled by risk-retention groups and are not regulated by any state agency.

4. Residential service contracts are optional. A seller cannot
condition the sale of his property on the buyer’s purchase of a home warranty.

5. A homeowner can purchase a residential service contract at any time. Service companies prefer to sell their product to homebuyers at closing because most buyers have a home inspected prior to purchase—and pre-exisiting conditions are not covered under their contracts. However, if your buyers aren’t ready to purchase a warranty now, most companies will sell one to them a year or two down the road.

6. The home warranty’s terms must be clear. By law, the service contract must be understandable and free from misleading language. The systems and appliances covered and not covered, the length of the contract, and the charge for service visits should be spelled out clearly. Advise your clients to make sure they carefully read and understand a home warranty’s terms before they agree to it, so they aren’t surprised in two months when they learn that their broken hot tub isn’t covered.

*source Texas Association of Realtors, Texas Realtor-July 2006