The Home Warranty Clause and how it works in a Real Estate Sales Contract
Some years ago, our Texas Association of Realtors Sales Contract for Homes was changed to include a fill-in-the-blank spot where the Seller can contribute a certain amount of money toward the Buyer’s purchase of a Residential Service Contract (commonly called a Home Warranty), such as those offered by American Home Shield.
The clause in the sales contract reads as follows:
RESIDENTIAL SERVICE CONTRACTS: Buyer may purchase a residential service contract from a residential service company licensed by TREC. If Buyer purchases a residential service contract, Seller shall reimburse Buyer at closing for the cost of the residential service contract in an amount not exceeding $__________ . Buyer should review any residential service contract for the scope of coverage, exclusions and limitations. The purchase of a residential service contract is optional. Similar coverage may be purchased from various companies authorized to do business in Texas.
I’ve not yet seen a deal where the Seller refused to agree to provide an amount sufficient to purchase at least a basic Home Warranty, usually $350 give or take. It’s a freebie. Therefore, a buyer should ask for the amount whether they want the service contract or not. Otherwise, they are leaving a free gift on the table.
In the case of our investor buyers, we use to work the deal out so that the buyer asked for the Home Warranty amount up front, but on the final Amendment, along with repair amounts, we moved the dollar amount from the home warranty to paragraph 12(A)1B, where the Seller pays for some of Buyer’s closing costs. We did this because most Austin Property Managers won’t use the Service Contracts when managing homes, because the warranty companies are an absolute nightmare to deal with from a property management standpoint.
Recently, however, after a couple of close calls with A/C units that almost crapped out shortly after closing, we started advising even our investor buyers to take the warranty after all, to have as a backup in case a unit actually did fail. So every buyer we work with now takes the Home Warranty, which is always paid for by the Seller.
But how does it work when representing a Seller in a deal? What happens when, prior to closing, the buyer decides they want the cash value of the Service Contract instead of the Service Contract itself?
Should the listing agent agree to allow the amount to be moved over, as has been the case with every listing agent I’ve ever dealt with when I represented the Buyer? After all, the net bottom line to the Seller doesn’t change at all. The answer is NO. A good listing agent should advise the Seller not to allow the dollar amount agreed to in the Home Warranty clause to be converted to cash at closing.
There is in fact substantial benefit for a Seller providing the Home Warranty to a Buyer. It greatly reduces the potential that an untimely breakdown of equipment immediately after the closing would cause a buyer to become upset and look to the Seller for remedy. So, when the Seller contributes 100% of the cost of the Home Warranty to the Buyer at closing, the Seller is obtaining a benefit also. That’s one of the primary reasons a Seller should be motivated to provide a Home Warranty. It serves also to smooth out the repair negotiations when an older piece of equipment is functioning as designed, but appears to be near the end of its life. In that case, the buyer can know that the equipment is covered for at least the first year, and perhaps feel more comfortable moving forward with the deal.
If the Seller allows a buyer to move the $350 dollar amount from the Home Warranty clause to the Buyer’s closing costs (paid by Seller) paragraph 12(A)1b, the Seller’s bottom line doesn’t change, but now he’s given away $350 and is receiving nothing in return whatsoever.