There’s a silver lining in every cloud and in the real estate recession, that lining is called home warranties.
Many builders offer warranties to cover appliances, mechanical syst3ems and construction of a new home. A second kind, sold to buyers of existing homes, typically don’t cover pre-existing conditions but for an annual fee of $250 to $600 will pay the cost of repairing the mechanical problems that regular home insurance doesn’t, such as clogged pipes, HVAC breakdowns, furnace failures, and appliances that conk out.
Less than one in five homes in America is covered by a warranty, except in California, where nine out of 10 existing homes in the Golden State are sold with a one-year warranty.
But that might be changing. Sellers trying to go the extra mile to land buyers are offering home warranties to sweeten the deal. In 2008, 42 percent of all sellers are offering incentives, including one-year warranties according to the NAR Profiles of Home Buyers and Sellers.
The home warranty business is hot. Revenues at Home Warranty of America grew more than six percent in the first quarter and the company expects to end 2009 with double-digit growth as it did in 2008. Buyers Protection Group, Inc., an Atlanta-based real estate services firm, is buying LandAmerica warranty business, which provides one-year home warranties in 30 states with concentration in AZ, CA, and TX. LandAmerica Home Warranty Company has been solid and profitable throughout the real estate recession, according to BPG executives.
In Texas, Warrantech Home Services Company of Bedford just launched a new warranty product for an annual fee of about $400. It’s one of ten warranty companies supporting the Texas Warranty Association.
“Things really started to pick up last year as people started to realize what was happening with the economy and think about what would happen if something essential was out of commission in their home. And here in Texas, we’re one of the states with the largest usage of home warranties with about 68 percent of homes sold having warranties, so the home warranty business in Texas is booming,” said Michael Brown, president of the Texas Warranty Association.
The foreclosure market, which represents about half of all existing homes sold today, has been a godsend for home warranties. Standard warranties cover property “as is” and not pre-existing conditions. However, when a house has been neglected for months during the foreclosure process and before as well, it may harbor problems that an inspection will miss. If something was overlooked, not visible or apparent at the inspection, a home warranty might cover a repair of the defect.
In blog after blog across the nation, real estate agents are urging their clients to rethink home warranties on foreclosures. Unlike homeowners, few banks are willing to offer them as incentive and none want to assume any liability after the sale. Yet buyers, afraid of what might be lurking down the pipes or above their heads, are paying for warranties themselves.
A few clever warranty marketers smelled profits in the foreclosure business and they started selling packages to foreclosure buyers, many of whom are first-time buyers and investors that include optional coverage of pre-existing conditions.
Creative marketing even extends to helping out renters-some of whom just might become tomorrow’s homebuyers. American Home Shield, a leading home warranty company, supports RentalForeclosure.com, a website that helps renters find out if the property they live in has been foreclosed upon.
“Even though our customer base is limited to homeowners–given that we provide repair services for covered systems and appliances–we feel it is important to support efforts that will help protect renters from unexpected evictions,” says Tracy Berger, HWA’s vice president of business development.
With foreclosures accounting for an ever increasing share of existing home sales, there’s no end in sight to the home warranty mini-boom.