Dakota Scott Realty

In September of this year the Minnesota Association of Realtors issued a new Purchase Agreement (PA) document.  One of the new features of that new PA is found on lines 180-185.  It is titled “Home Protection/Warranty Plan” and advises sellers and buyers to investigate the various home protection/warranty plans available.  The PA requires the buyer and seller to state whether or not a plan will be obtained and who is going to pay for it.  Or, the parties can indicate that no plan will be part of the PA.

This is one Realtor who adamantly believes this addition to the PA is a mistake, was ill-conceived, and is very poorly presented.  The new PA calls these plans “home protection” and “warranty” plans, probably because that’s what the companies that sell them call them.  But these plans don’t protect homes one bit.  Nor are they warranties – they don’t guarantee a thing.  They are service plans.  They absorb some of the cost to repair or replace some items in a home that break.  The purchase agreement is not supposed to be a marketing tool for the companies that sell these plans – but now, that’s what it is.

If a seller decides to activate and pay for one of these plans when they put their home up for sale, and extends that plan to the buyer of their home, I’m all for that.  That seller has already decided that the cost of the plan is simply another selling expense and not a seller concession requested by a buyer.  It doesn’t count against the buyer in negotiations.  But the new PA baits buyers into erroneously thinking that they can request a plan and have the seller pay for it.  Even if the PA shows that the seller is going to pay for a plan, in reality the buyer pays.  If a seller agrees to pay for a plan that costs, say, $400, that means the seller would have accepted $400 less for their home if they didn’t have to pay for a plan.  So in this example, just like when a seller pays for a buyer’s closing costs, the price – not the value – of the home has been increased by $400.

If a buyer decides to purchase one of the plans on their own, it’s none of the seller’s business.  What if the buyer indicates on the PA that they are going to purchase a plan at a cost of $400 – now the seller knows the buyer has an extra $400 – maybe the seller wants that money instead of letting some home warranty company get it.

Well, you get the point – I don’t like the fact that this is in the new PA.

But, it is.  And as a buyer’s broker I decided I’d better get prepared to answer the inevitable question my clients will have: Which One Should I Get?  I can’t tell my clients that they should or shouldn’t buy a plan – it’s their money, their home, their risk.  Nor can I tell my clients which plan they should get.  I’ll give them copies of the sample contracts to read and review – well in advance of decision time.  But I know they’re not going to read them, there are too many other fun things to do when you’re looking for a home to buy.  In an effort to help my clients, I read and analyzed the four plans that I am familiar with.  The breakdown of what each has to offer follows below.  Read it, then decide for yourself.

These service plans are not insurance plans.  They don’t cover things like fire or water damage, or accidents.  However, when you’re deciding whether to buy one and which one to buy, in a way you’re going to think as though you’re buying insurance.  You’re going to observe the condition of the components of the home you want to buy and then you’re going to ask yourself, “How likely is it that this particular component is going to fail in the next 12 months?”  If the likelihood is high and the cost to fix it will be at least $500, then you may want to buy a plan that will cover that component.  If you think the likelihood is low that components in the home will fail during the next 12 months or if they do that the cost to fix them is less than $500, then you might decide the cost of a plan outweighs the risk.

The plan contracts are lengthy and consist of only fine print and long lists of exclusions, restrictions, and limitations.  Likewise, this blog post is long, very long.  But a topic like this cannot be covered without going into details, yet I don’t represent for a moment that this analysis is dead accurate or complete.  You still need to read each contract and evaluate them relative to the specific home you are going to buy.  It’ll take some time and your brain will hurt when you’re finished.  The plan contracts are much broader than what’s necessary for my Twin Cities clients.  So in an effort to make this analysis a little easier to digest, I pared down the information to better suit my typical home buyer clients.

Plan Names:       Here are the names of the four companies that I am familiar with that sell plans in Minnesota:  AHS, HMS, HSA, HWA.  Not much creativity in their names.  Maybe there’s a marketing reason to that, but it escapes me.

Residential Type:             All of the plans I evaluated are for existing (used, resale) single family residences, whether owner occupied or rental property.  AHS, HMS, and HWA single family plans also cover condos and townhomes.  HSA will cover condos, but for $30 less.  Their price list does not show townhome coverage as available.  The plan companies also offer plans for new homes, but I did not evaluate those plans.

Plans & Prices:   Each company offers one or more plans plus one or more additional options.  You could buy a basic plan or you could buy the whole enchilada, or something in between.  Because each plan has unique features, it’s impossible to do an apples-to-apples comparison.  Based upon my experiences with my buyers over the years, I compared plans that have the features that I’d guess my buyers would want.  These are the plans I evaluated:

AHS – Core Coverage Plan ($432) plus the Flexplan Option for refrigerator, washer, & dryer ($102).  The plan plus option total cost is $534.

HMS – offers a base plan for $425.  For $20 more they offer roof and foundation coverage, but their sample contract does not describe these coverages, so I did not evaluate them.  When I asked the local marketing rep for information about their plan, he told me that when my buyer purchases an HMS plan for $425, HMS will pay me $60, so I need to send them only $365.  I take that to mean that the real price is $365.  HMS has an interesting feature called the Preventative Maintenance Benefit – after the first 9 months, if you have not placed any claims, they will pay $100 toward an AC or heating system maintenance service.

HSA – offers one plan at two different prices, depending on the “deductible” amount.  If the deductible is $75, the plan costs $439.  If the deductible is $100, the plan costs $419.

HWA – offers three plans and several options.  I evaluated their Platinum plan which costs $400 and has a $100 service fee.

Service Call Fee:               If you have one of these plans, when you call for service on some item in your home, it will cost you a service fee.  Some of the plans call the fee a deductible, but it’s not really a deductible because you will be charged the service fee even if work is not performed.  Also, with most of the plans, you will pay the service fee to each trade contractor who is involved in the work.  For instance, if your furnace needs to be replaced and some electrical work needs to be done for the new furnace, you’ll pay a service fee to the heating contractor and also to the electrical contractor.  HMS does not do this.  They only charge one service fee of $100 per service call, no matter how many service contractors are involved.  AHS charges a $60 trade service fee for each service contractor.  HSA offers their plan at two different prices, depending on the service fee amount.  If the plan costs $439, then the service fee is $75.  If the plan costs $419, then the service fee is $100.  HWA also offers two service fees.  If you want to pay only a $50 fee you can, but the plan’s coverage is less than if you selected a plan that charges a $100 service fee.

Coverage Period:             Generally speaking these are 1-year plans.  They typically start on the date of closing and expire one year later.  The exception is HWA – their plan is a 13-month plan.

Coverage:           These plans are “repair or replace” plans.  The plans all promise to fix covered items, even if that means replacing them with new ones.  However, the plans do differ in exactly what they will replace items with.  AHS, HSA, and HWA all say they will replace with items of similar features, capacity, and efficiency.  HMS says it will replace with base models.  All of the plans say they reserve the right to offer a homeowner cash in lieu of repairing or replacing an item.

Conditions for Coverage:             The standard that must be met to qualify for coverage is that the item that needs service must be inoperable or malfunctioning due to normal wear and tear.  If it was damaged or misused, it’s not covered.  If the item malfunctions due to insufficient maintenance and you have an AHS plan, you’re covered.  Not so with the other three plans.  If the item malfunctions within the first 30 days of coverage due to rust or corrosion, and you have an AHS plan, you’re covered.  The other plans make you wait 30 days before rust coverage kicks in.  Three of the plans state that, to be covered, an item must be within the confines of the main foundation or garage.  The HMS plan simply says that an item must be in the home (no mention as to whether an item in the garage qualifies for coverage, so assume it does not).  And three of the plans state that, to be covered, an item must be working at the time the plan starts.  But the AHS plan does not draw that line.

Non-Covered Items:       This is important.  These plans are full of exclusions, limitations, and restrictions.  The plans list items that are covered and the wording is very specific.  Then, they go on to make a blanket statement of what is not covered: anything not stated as covered.  So the only items that are covered are the things that are specifically listed.  If it’s not listed, it’s not covered.  Also, most of the plans state that they won’t cover things like damages that result from a service contractor’s service or delays in service, or for faulty workmanship by a service contractor, even one that they selected.

What’s Not Covered?     With all the plans, coverage does not include routine maintenance, or defective items, or removal and disposal of old items, or damage due to accidents, fire, or freezing.  The AHS plan also states that damage due to mold, mildew, and pests is not covered.  Also not covered would be modifications that need to be done in order to accommodate a new replacement item.  And when replacing items with new ones, the plans won’t pay for upgrades or to match colors, models, dimensions, or brands.  With some of the plans, coverage for some exclusions can be purchased at additional costs.

Maximum Coverage Limits:         Unless it’s hidden someplace where I just couldn’t find it, the AHS contract makes no mention of coverage limits.  The other three plans definitely do.  The other three plans (HMS, HSA, HWA) limit the coverage per claim to $5,000.  HSA limits it lifetime coverage to $25,000 while HMS and HWA have $15,000 lifetime coverage limits.

Claims Process:                With all of the plans, if you experience a problem with a covered item in your home, you first need to call your plan company.  They all have toll-free numbers that are staffed 24/7.  The next step varies somewhat among the plan companies.  With AHS, a service contractor will contact you to set an appointment.  With HMS and HSA, you will contact a service contractor from a list of approved contractors.  HWA will select a service contractor for you.  What’s important is that you need to read about and be aware of the exact process set forth by your plan company.  If you don’t follow their process they probably will not cover the repairs.

Home Service Plans – Buyer Coverage for existing (used, resale) single family homes

Be Aware: If the home you plan to buy has hot water or steam heat, as many homes do in the Twin Cities, the most these service plan companies will spend to fix or repair the system is $1,500.  That doesn’t go very far if you’re in need of a new boiler.  If your forced air heating system has an electronic air filter, also common in our area, it’s not covered.  Only HSA covers humidifiers attached to the furnace, which are common and often recommended for indoor comfort.

Be Aware: Window AC units are not covered, period.  HMS is the only plan that will cover wall units.  If the existing central AC unit can’t be repaired and instead needs to be replaced, federal law requires that the new AC meet at least 13 SEER efficiency specifications.  Some plans state that they will automatically install 13 SEER equipment at no additional cost.  Other plans don’t address the issue.  If the AC unit of the home you plan to buy looks pretty old, you may want to read this section of the plans very carefully, and ask questions, before you decide which plan to buy.

Be Aware: Plumbing problems are very common with newly purchased homes.  Clogged drains, including the main drain line going to the City’s sewer line, rank at the top of the list of problems that occur soon after moving into a home.  If the home you’re going to buy is older, maybe unoccupied or occupied by only one person, there’s a good chance you’re going to have plumbing problems.  Typical problems are clogged drains and faucets that don’t flow well.  If you decide to buy one of these plans, then you’ll probably want to get a plan with good plumbing coverage that covers a broad range of problems.

Be Aware: The electric system is pretty static (pun!) and not much can go wrong with it.  It doesn’t really wear out.  But I do like the idea that some of the plans cover the items that can wear out, such as fans and light fixtures.

Be Aware: Appliances get used a lot and they break a lot.  Coverage for appliance repairs is a key benefit of these plans.  AHS does not include three of the most important appliances – refrigerator, washer, dryer – in their base coverage plan.  Instead, you have to pay extra to get those items covered.

Be Aware: HSA and HWA say they’ll cover roof leaks, but when you read the exclusions you realize that pretty much everything that causes a roof leak is not covered.

Alternative Plans:            Both Xcel Energy and Center Point Energy offer service plans for appliances.  I’ll take a look at those plans in a future blog post.