Last updated October 16, 2020
With the number of costs involved in building homes it’s not hard to understand why a homebuilder would forgo the additional cost of purchasing a third-party builder home warranty. But this could end up costing much more than the price of the service.
Even with the highest quality of craftsmanship and care, homes are at the mercy of nature and sometimes defects occur for reasons beyond a builder’s control.
Builder warranties provide protection not just for homebuilders, but for homebuyers as well. Value that goes beyond a good selling point. In this article, you’ll learn what a builder home warranty is, what they do and do not include, and why you should consider investing in one for your homebuilding business.
What is a builder home warranty?
Builder home warranties are third-party protection on newly built homes and are purchased by the builder. Most of these warranties are limited to the coverage of the building structure, materials used, and workmanship, which commonly includes the following elements:
A builder’s home warranty plan typically lasts one to two years with coverage up to 10 years on major structural components. They are not required – except in the case of VA and FHA loans – but having one can be a major advantage to homebuilders. If you’re on the fence about working with a third-party provider and including a builder’s warranty with your new builds, the next section will shed some light on why you might want to go ahead and take that leap.
Why homebuilders should have a builder home warranty
Here are five reasons every homebuilder should invest in a third-party builder warranty:
They provide additional risk protection
General liability and risk insurance certainly help manage risk – protecting homebuilders from financial responsibility should injuries and property damage occur due to negligence or accidents during construction. However, once the homeowner takes hold of the title, these protections do not cover structural defects or poor workmanship that rears its head later on.
A builder’s warranty provides the additional protection post-closing to cover financial and legal risks due to possible structural distress. Statistically, one in four homes will have structural issues during its lifetime and many within the first seven to 10 years of being built. The average minimum investigation and repair cost for structural element problems is roughly $42,000, and this does not include the possible extensive legal fees and tarnished reputation you could endure should the homeowner choose to sue.
In fact, annual claim payments reported by U.S based homebuilders hit 783 million dollars in 2019 – a 9.1% increase from 2018. So, it’s clear there’s a financial need to invest in a third-party warranty provider to protect your assets. Regardless of your impeccable attention to detail and quality building, anything can go wrong.
It’s also important to note that individual structural engineer’s insurance should not be relied on either. Builders can still be liable for poor craftsmanship or not following engineer recommendations directly.
They set expectations for homeowners
Third-party warranties are a bit more builder-friendly because they make it clear to homeowners what home systems, products, and problems are not included in the warranty. This protects you from homeowner expectations to cover any and all possible issues. This additional homeowner education helps avoid unnecessary conflict, and can result in more satisfied homeowners because they know exactly what they are protected from before making a life-changing investment.
Builder home warranties typically do not cover:
Each warranty company is different, but this is a pretty common list. Also worth mentioning, is the added benefit for both you and your homeowners to have a third-party to negotiate and mitigate should an issue arise. 78% of homeowners say having an independent, third-party warranty company to advocate for them is significantly valuable.
They appeal to buyers
Because builder warranties are not always required and do cost money, as a result, many builders have not taken advantage of their benefits. Builder warranties not only protect homebuilders, but homeowners as well, giving many consumers the peace of mind that they have financial and legal security if their new home happens to have a structural defect.
One of the greatest deterrents for buying a home is financial stability. In the first quarter of 2020, homes were listed at five times the median income of first-time buyers in 20 of the 50 biggest metropolitan areas. With the percentage of first-time buyers continuing to grow, it’s critical to recognize the unique financial challenges they may face and find ways to alleviate their fears of potentially crippling home repair costs. A builder warranty is a great way to do this and can quickly pay off.
They help sell houses
Because homeowners want houses with builder warranties, they are willing to pay more for that structural protection. Over 60% of homebuyers say they believe homes that come with builder warranties reflect higher quality construction and 67% say that a warranty is worth more than $500 to them (the average cost of a home warranty). Not to mention, the resale value of a home can increase for sellers, since builder warranties stay in place until they expire, no matter who owns the home. This can be a great advantage to homeowners should they decide to sell – a great marketing value proposition for you as the builder.
They save resources
Using a third-party to handle the logistics of warranty responsibilities like writing, issuing, and maintaining records means you can focus your time and efforts on constructing exceptional homes, taking care of daily tasks, marketing efforts, keeping your buyers happy, and growing your business.