Builder’s Bankrupt – What about the Warranty?

If I’m wrong, please correct me in the comments.

This is not specific real estate advice but a thought I had recently. With some of the local builders struggling, what happens to the one year builder warranties and other, longer warranties?

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 that 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 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 AHS.

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.

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14 Comments

  1. Brant Meyer November 25, 2008 at 11:33

    Hi Jim,

    Love the blog – and you bring up some good points about homebuilder warranties

    That said, I strongly and respectfully disagree with you on the third party home warranty issue. They are a like throwing money away. Here is the best synopsis of the issue I’ve found so far – I didn’t write it, but it sums up the issue perfectly:

    “Home warranty companies sell warranties for $450 a year. If the warranty company has to pay out more than $450 to each homeowner in a year, they’ll go broke. Statistically less than 25% of the money goes toward home repairs – most of it goes toward profit and marketing. You’re much better off to put the money aside and have an emergency fund of 3-6 months of expenses.”

    On top of that, most 3rd party warranties are structured in a way that the items covered have a very low risk of failure. It’s like when Best Buy wants to sell you the extended warranty on an Ipod – they make more on warranty fee then the entire sale of the product itself.

    Reply
  2. Jim Duncan November 25, 2008 at 12:10

    Brant –

    Thank you for the comment.

    First, I’d advise both – a home warranty and 6 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.

    PS – I’ve asked the rep who services my region to stop by and offer her input.

    Reply
  3. Mark November 25, 2008 at 12:12

    Brant, I’m sure the home warranties are no more economical than the iPod warranties (or extended warranties on cars) . They probably make a tidy profit as you assert, but I think the point made above was that the home warranty is better than nothing if the builder goes belly up. If you do have a problem, I don’t think there’s any question that the warranty company will pay according to the terms of your warranty.
    Economically speaking, an even bigger rip-off is car insurance.

    Reply
  4. Brant Meyer November 25, 2008 at 12:15

    Good discussion. I’m looking forward to hearing more!

    Reply
  5. Jonathan Blackwell November 25, 2008 at 23:17

    I also love the blog, but will also disagree on the home warranty. I had a AHS warranty, it was essentially worthless when I had an issue with my AC.

    Reply
  6. Jim Duncan November 26, 2008 at 19:22

    Jonathan –

    Thanks for stopping by. Without disagreement, where’s the fun?

    Reply
  7. Allan Duncan November 27, 2008 at 03:19

    Hi Jim, I’m new to your blog and I got and idea on what to post to my blog. I wonder what home warranty is called here in Dubai. I need to find that out.

    Reply
  8. Donna Schmidt December 1, 2008 at 19:45

    Thanks Jim, for having an informational blog. And yes, here I am, your American Home Shield Warranty representative. I appreciate the positive points you make about home warranties, especially in this market. Most warranty companies are retructuring their products to provide additional coverage and options for home owners to better service them. Clients purchasing foreclosures are walking in on “as is” homes. The new FlexPlan with Service Plus covers those pre-exisiting conditions that were not seen in a walk through or couldn’t be tested.
    With regards to the gentleman and his AC unit, could it have been that the situation at hand was not a covered item? The myth that warranties cover everything…..we all know….is truly a myth. Prior to AHS launching our new FlexPlan, insufficiently maintained systems was…..a non covered item. Could it have been that the gentleman’s AC failed due to lack of maintenance? Even though there is a warranty on a home, it still does not negate the fact that the home owner still should maintain their systems and appliances up to manufacturers recommendations. Lack of maintenance calls were a large portion of our service calls, so, when we revised our product, we included this in our coverage.
    On the subject about claims and dollar figures…..AHS paid out, just in claims, in 2007, nearly $305,000,000.00.
    Believe it or not, there still are a few good, honest companies, and I am proud to say that American Home Shield is one of them. I do believe that my customers, the great Realtors of Virginia and West Virginia, can honestly say that I don’t let them down, and that American Home Shield stands behind their product.
    If anyone has any questions, concerns or issues about our warranty, feel free to contact me via email or cell phone. (301) 399-4419. I would welcome the opportunity to chat with you.

    Reply
  9. Donna Schmidt December 1, 2008 at 19:53

    Oopps…sorry..typo… should be restructuring. My mind is not all here…been busy helping out some of the 1.5 million homeowners we currently service.

    Reply
  10. Gary Laursen Construction Inc. December 6, 2008 at 16:04

    Most builders have a 1 year warranty on their homes. However, the warranty is simply one line on a contract, or a napkin, which says just this: Home warranted for one year. Duh ? Anyhow we have prepared a home warranty which includes a maintenance program and spells out nearly everything which may arise out of any defects in materials and workmanship. Example: How wide must a crack in the concrete driveway be, before the builder has to replace it. (Answer is 1/8″) Next – if defects have to be shown by the use of a high powered magnifying glass, and can not be seen with the naked eye, is it covered by the warranty (Yes – this has happened to us with one client from Hell) (Answer is no) Does the builder accept the expense of repair/replacement of “Oil Canning” ( Where an HVAC duct makes popping sounds because of temperature changes) (The answer is yes, and it can get costly for the builder) Things like this would not be noticed in a “Walk Through” as you would have to live in a home for a while to notice it. This warranty covers both the builder and the homeowner, as it sets standards and limits, so we all really know where we are. It also tells about all the functions of the home and use and care and a very detailed maintenance section. It is not all about buying insurance and suing each other. We are thinking about publishing this – every builder in the World needs to furnish one of these with their new homes. Feedback is very welcome…. We are in Oregon

    Reply
  11. Pingback: Buyers’ Recourse if Builder goes Bankrupt | Real Central VA

  12. Harold Woods February 12, 2010 at 21:15

    Hello, My house was built in 1959, and I bought it December 1999. For the last two years I have had to add three pounds of freon. My question is that this type of home warranty would do me of no service untill I fix the problem first, and pay for years untill I have the same problem arise agian. Is this a correct statment? Sorry, but I thought I would just ask this dumb question. Thank you very much

    Reply
  13. Donna March 27, 2010 at 22:39

    Harold,

    When a system loses refrigerant, that is usually considered a “normal wear and tear” item, which is covered by a warranty. Most systems lose refrigerant over period of time.With the new HVAC Legislation, it will be more important than ever for someone to have a warranty on their home to help with the “shocking” charges it could cost to repair or replace a system.

    Reply
  14. ac repair fairfax May 11, 2011 at 19:07

    I think that Warranty is not Guaranty. many people believe that if a company has given surety of Guaranty then they dont care about that and use roughly rather than according to manual. But on the other hand, some companies dont follow their given policy.

    Reply

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