Home warranties may help sellers—if price is right, says Longwood professors’ study
“Media attention about home warranties has focused on the surface value of these policies for homeowners,” said Dr. Justin Contat, a business professor at Longwood University in Virginia. “What the data shows is that, in many cases, sellers and their brokers are effectively using them as a cheaper alternative to lowering the price of a home when buyers may have doubts.”
Contat and his Longwood colleague Dr. Bennie Waller combed through 15 years of home sales using MLS (multiple listing service) data in the Richmond market from 2000-15. They found that the use of warranties had grown over that period, and by 2015 warranties were being used in 15 percent of transitions. What the researchers wanted to know was whether or not warranties were paying off for home sellers.
“What we found was that, for any house still on the market, including new listings, offering a home warranty makes the home more likely to sell at any given instant,” said Waller. “However the effect of the warranty on likelihood or speed of the sale really depends on the price.”
A typical warranty costs $300-$500, lasts for one year and covers repairs for most home appliances and home systems such as electrical, mechanical and plumbing.
The research showed that, for a home priced at $100,000, offering a warranty will increase the likelihood of sale by 53 percent at any given time. Meanwhile, estimates suggest that homes priced at $300,000 will actually sell about 2 percent more slowly.
Warranties impact homes’ selling prices in much the same way. For homes priced less than $100,000, adding a warranty increases the price by $2,346. Homes priced between $100,000 and $300,000 saw prices increase by about $1,100. However, when it comes to homes valued at $300,000 or more, adding a warranty decreases the price by about $9,700.
“We saw a tipping point of $251,000,” says Dr. Contat. “It appears that, while buyers of lower-priced homes see warranties as “peace of mind” protection from unexpected costs, warranties on higher-end homes may be interpreted as a sign of defects to wealthier buyers who are less concerned with those costs.”
The Longwood researchers concluded that the main beneficiary of a home warranty is not the buyer but the seller of the home.
“Rather than lowering the price to provide value to a buyer, a seller can offer a home warranty that costs less but provides the same or more value,” said Waller. “However, based on the results of our research, it would only make sense that brokers and agents representing sellers suggest home warranties on smaller and less expensive properties.”