REAL ESTATE- GIMME SHELTER- Worthless warranties? They may be better than nothing

Jim Duncan
Century 21 Manley,


Q: With some of the local builders struggling, what happens to the one-year builder warranties and other, longer warranties?

A: Everything I have read to date and the answers I have been given leads to this answer: Sorry. Other than personal promises, once the builder's gone, so are the warranties– implied and otherwise.

I haven't found a more succinct explanation than Ilyce Glink's at Inman News: 

"Please talk with a good real estate attorney who has experience with new construction contracts. You'll want to review what was promised to you in terms of the warranty. Then, have your attorney contact the builder to see what's going on.

What you may find, in the current economic climate, is that the builder is either bankrupt, has gone under, or is slowly going under. If the builder goes out of business, your warranties from the builder will likely be worthless. However, there may be underlying warranties from the materials manufacturers that may protect you somewhat. These manufacturer's warranties might include the windows, the heating and cooling systems, plumbing fixtures, roofing materials and some other components installed in the home."

Here's my thought– get a good home warranty. I've recommended several to clients before, one of them is  American Home Shield (

In this world, a home warranty may be better than nothing– heck– if you're buying new, get the builder to buy several years of a home warranty for you. 

Of course, some experts believe that third party home warranties are like throwing money away. Because they're structured in a way that the items covered have a very low risk of failure, statistically less than 25 percent of the money that home warranty companies earn goes toward home repairs. As one colleague put it, "It's like when Best Buy wants to sell you the extended warranty on an iPod– they make more on warranty fee than the entire sale of the product itself."

Some believe you're much better off putting that money aside and having an emergency fund of three- to six-months of expenses.

First, I'd advise both– a home warranty and six months of emergency funds.

Second, in my experience with my clients, they have been more satisfied than not. Over the years, I've seen probably an equal number of opinions strongly against and for home warranties, but think that in this new world, with builders going out of business, that this could be better than the alternative, which is nothing.


1 comment

Beware of home warranties that have an arbitration clause. If a claim is denied or too little is offered to cover the repairs, the warranty co can force disputes into mandatory binding arbitration, and can choose the arbitration firm which is a 'repeat player' problem, and potential for bias in the warranty co's favor. Since this is private arbitration, you can't just research complaints very easily, you have to rely on consumer gripe sites which unfortunately many people do not take seriously. Home warranties exclude so many things from coverage that between exclusions and the arbitration clause, some lawyers call them "illusory coverage." And, since they are usually "Risk Retention Groups," not insurance co's, the state's Dept's of Insurance likely won't get involved over illusory policies, arbitration clauses that may not be allowed in insurance policies in some states, etc. Buyer Beware and don't let a "warranty" lull you into a false sense of security.