Home > Home Buying > Understanding Known vs. Unknown Pre-Existing Conditions in Home Warranties

In today's BUYER's market, it is common to ask Sellers for a Home Warranty to cover the general, mechanical, major appliances and other items during the 1st year of ownership. To understand what is covered in the plan, please read your contract including its fine prints and limited liability coverage. Home Warranty plans ares a peace of mind that the Sellers give the Buyers that there are no major out-of-pocket costs should something major goes out in the house during the first year of ownership. (Home Warranty plans for good for 1-year and renewable at every anniversary date).

First, it is important to understand that Home Warranty plans are good to have but it is not a catch-all for repairs and replacements. It is certainly not a means to ignore home maintenance. The statement about "my a/c goes out, and my a/c gets replaced" may or may not be true in all circumstances. Thus, understanding what your contract says will help save some heart ache of what to expect when you call the company for a warranty in the future.

How to determine KNOWN versus UNKNOWN Pre-Existing Conditions

No Home Warranty Companies will cover KNOWN pre-existing conditions. In order to determine an UNKNOWN pre-existing condition, a home inspection report is used. If an issue was noted in the home inspection report and no action was taken, it would be deemed as a KNOWN pre-existing condition. Hence, the problem will not be covered by the Home Warranty.

For example: A home inspector noted that there was a leaky faucet in the kitchen, it becomes a known pre-existing condition for the buyer. If the buyer request that the Seller fix the problem and the Seller provided a receipt upon repair, the buyer would then be required to ask the plumber who perform the job to warrant his/ her work. The Home Warranty company will not be responsible for the repair.

However, in some cases where the home inspector did not report a problem or no home inspection was performed prior to closing, then the Home Warranty company would require that a contractor be sent into the property to diagnose the problem. The Home Warranty company would also ask the contractor if it would be a problem that would have been caught by the home inspector. If the answer is "Yes", then the Buyers will be responsible for the repair and if the answer if "No", then the Home Warranty will deem it as an unknown pre-existing condition, hence repair the problem at no cost to the buyer.

For example: A 12-degree temperature differential is noted on the air-conditioner. It is a border-line question-mark for a problem with the a/c unit. On top of that, the vents are 100% clogged. This means that the unit is in LACK OF MAINTENANCE. Some Home Warranty companies cover this issue, some don't. Check your policy for this coverage. When a contractor is called to diagnose this problem and no previous inspection report is available for a comparison, chances are that the contractor would say that this is an obvious problem that a proficient home inspector would be able to catch. Hence, this is deem as KNOWN pre-existing condition. How the Home Warranty company want to address this problem is entirely up to the Home Warranty company. If the same unit had a 12-degree temperature differential is noted with the vents at 50% clogged, when the contractor comes into the property and inspects the unit. He/ She may deem this problem as an "if-fy" problem and gives the benefit of the doubt to the buyer that this problem may not have been caught by a proficient licensed inspector, hence the Home Warranty may fix the problem.

Real Estate Agents: Doesn't this issue bring a whole new meaning to your repair negotiations now? I know it did mine.

Some home warranty companies may or may not include rust or corrosion, mismatched systems and improper installation or mechanical failure was not known and could not have been detected by visual or mechanical inspection.

When It Is Repaired versus Replaced?

This is the million dollar question that every buyer ask. Whenever the problem is fixable by replacing a part, then it is expected that the part be replaced (not the entire unit) and the unit becomes fully functional again. 

More Fine Prints not typically disclosed

When an a/c unit is successfully replaced by the home warranty, the Home Warranty company is only responsible for replacing the unit. Should the concrete slab be too small for the new replacement unit and requires a new slab, it would be an extra and separate charge by the contractor to the buyer because the Home Warranty company is only responsible for replacement. If a new furnace is replaced in the attic and the trusses is in obstruction of the unit, the Home Warranty is not responsible for the labor to move the furnace to another new location, or it is also not responsible for altering the trusses and joists. Also, the haul-away of the old unit is typically not covered. Freon disposal is usually also not. Some home warranty would cover these at an additional cost.

Expectations of Like-Features

Assuming you have a top-of-the-line dishwasher and it was broken. This dishwasher was custom made with a Picassa mounted painting on the door. It cost you $5,000 when you bought it. A contractor was called for replacement. The Home Warranty company agrees to replace the dishwasher, but the Buyer could only expect that a standard dishwasher be the equivalent replacement for the policy, not the $5,000 Picassa-mounted painting top-of-the-line dishwasher.

The Good News

To become competitive, more home warranty companies are adding new services in their coverage. These may or may not be included in the core/ basic package:

• Twice a year a/c and heater maintenance tune-ups
• Pest control service (on an as-needed basis and a service fee is requested at each call)
• Termite treatment
• Sprinkler system
• Re-key service

To be on the safe side, whenever possible - if an upgrade package is optional, buyers might want to consider purchasing this upgrade package to include more coverage in the policy. This upgrade package is typically less than $100. It will be worth the investment.

The Up-Sell Contractors

Some home warranty companies allow contractors/ trades to up-sell the buyers should it be warrant. The buyer has the option to accept or disagree.

For example: A minimum 13-seer a/c unit is recommended as a replacement. It costs $2,000. However, the contract could introduce and explain the benefits of replacing it with a better model, 16-seer.  It costs $4,000. The Buyer has the option of replacing with a 13-seer unit with no additional out-of-pocket expenses other than the service fee. If the buyer decides to replace it with a 16-seer unit instead, the Buyer would/ could pay the difference between the 13- and 16-seer units. I think it is a fair example. The same with unit replacements.

All these information is perhaps more than you want to know but knowing this information can clear up your expectations of your home warranty. The inspection report becomes much more important especially in negotiations with the Sellers.

Note that this important is provided to you as a real estate agent and not from a Home Warranty. I use my experiences and knowledge to share with you what I understand about Home Warranty. The information I provided may or may not be true and correct for your particular home warranty company. Check with yours to find out the proper details.

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