When is a home warranty worth your consideration as a sales incentive for a fix & flip project?

A home warranty is not the same thing as homeowner’s insurance. Homeowner’s insurance covers loss due to damage from fire, severe weather, theft, vandalism, accident and crime. But it doesn’t cover mechanical breakdowns of appliances and home systems that are not caused by any of the above factors.

By contrast, home warranties are more like automobile warranties – they cover just the mechanical parts of the home in case of breakdown, for a given period of time (one to three years is typical). Coverage includes repair and replacement (partial or full) of plumbing, heating, air and electrical, and sometimes major appliances.

Home warranties also often include a service contract with a number to call in case of a mechanical problem on covered items. The home warranty company will dispatch a service provider to make repairs. The homeowner pays a low flat fee per service visit ($69 to $79 is common), regardless of the actual cost of the repair.

Home warranties offer three possible strategies for a real estate investor:

• Incentive for homebuyers.
• Protection for you, as the seller, after the sale from complaints about “full disclosure” if there are problems with mechanicals.
• Protection for rental investors.

If many new-build homes are available in your market, you may find that homebuyers are more comfortable buying your older flip property if it includes a home warranty. Any home may sell more quickly if a warranty is offered with the sale to boost the buyer’s confidence. But if warranties are unusual in your market, the expected $300-$500 premium probably isn’t worth the bite out of your profits.

Like anything else with your fix & flip, offering a home warranty is only worth doing if it pays itself back.

• Help your property become more competitive and thereby reduce the time on the market.
• Firm-up your asking price by making concessions for mechanicals less necessary.

Generally speaking, home warranties are most cost-effective when the covered systems are more costly.

• Appliances and systems are new or newer and in good condition. There is less to dispute with the warranty company over proper maintenance during the life of the item.
• The home has higher-end appliances and systems that will be more expensive to replace in case of an unexpected failure. Even if not fully reimbursed, the coverage will still be a welcome relief and make the premium more worthwhile.

If you decide to offer a home warranty with the sale of your fix & flip, or have one to protect your rental property, vet the provider carefully through your State Department of Insurance, the Better Business Bureau and online reviews.

Understand home warranties and use them – or don’t – as another tool to make the most of your real estate investment project!

Are home warranties offered on any sale properties in your real estate market?

Want to earn money with little or no investment of your own? Keep an eye out for my upcoming ebook explaining wholesaling and how to make it work for you!