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What Is a Residential Service Contract?
A residential service contract, sometimes called a home warranty, home service contract, or RSC, is a service policy with the primary aim of safeguarding a property buyer from unexpected repairs to home systems. As a homeowner or buyer, you can use this type of policy to repair or replace major appliances or mechanical systems in your home. Alternatively, if you're selling a home, you can protect your property with this type of policy while the house is listed and also offer this contract to the buyer when you sell the home.
All in all, a residential service contract functions to reduce the costs of repairs and replacements for policyholders if a mechanical item covered by the policy fails. Most policies last for one year, though some insurers do offer longer policies.
How Does a Residential Service Contract Work?
If you're thinking about purchasing a residential service contract, there are a few different things you should know about how these contracts work:
Choosing Your Coverage
You usually get to pick whether your residential service contract will cover only home systems, appliances, or a combination of the two categories. Some insurers also offer different tiers for coverage, such as one tier for major appliances and another tier to cover all appliances.
Additionally, you get to choose the insurance provider you use. Keep in mind that insurers usually contract service calls to their network of local contractors. Before signing a contract, you should make sure that the insurance you plan to use has contractors near you.
Placing a Claim and Diagnosing a Problem
If you are a homeowner holding a residential service contract, you can either call or go online to place a claim with the warranty company if a problem occurs. The warranty company then notifies a licensed, insured third-party contractor. The contractor reaches out to you to set up an appointment, during which they diagnose the cause of appliance or system failure.
Once the contractor makes a diagnosis, they contact the warranty claims department with their findings, and then the claims department checks the terms of the contract to determine if they will approve or decline your claim. If the claim is approved, the level of coverage you have previously chosen will determine any out-of-pocket or non-covered expenses for your claim.
Most insurance policies include a deductible, which is a minimum payment you have to make before your insurance pays for any expenses. This is true of home warranties as well. You will usually make this payment as a call-out fee, a small sum of money you pay for someone to come to your house.
Call-out fees are usually around $100 or less, but you should make sure that you know what your call-out fee would be as well as any other additional deductibles before you sign your contract. That will also help you decide if it would be better to make simple repairs yourself instead of paying more for a call-out fee.
Advantages of a Residential Service Contract
If you're selling a home, you'll find many benefits to offering a residential service contract to your buyer as part of the real estate transaction. For example:
- A residential service contract minimizes the risk that your buyer will ask you for additional help if a home appliance unexpectedly fails right after the sale.
- Giving the buyer a residential service contract at the close of your sale can help convince the buyer to move forward with you instead of another property holder.
- A residential service contract makes it easier to discuss repairs with potential buyers. This is especially true if you have a functioning older device in your home that will likely require a replacement in the near future. The buyer may feel reassured that that device is covered for at least a year, giving them the confidence to complete the real estate transaction.
What Do Residential Service Contracts Cover?
A residential service contract may cover appliances, systems, or both. Exact coverage varies from policy to policy. Most contracts cover systems and appliances no matter how old they are, just as long as they are in working order. You will always want to check directly with an insurer if you have any questions.
Appliance plans generally cover major appliances, including:
- Water heaters
Systems plans generally apply to home systems, including:
- Alarm systems
Combination plans cover both systems and appliances.
What Don't Residential Service Contracts Cover?
It's important for anyone considering a residential service contract to understand what these plans do and don't cover. Residential service contracts commonly do not cover:
- Any pre-existing or known conditions
- Commercial-grade appliances
- Commercial properties
- Design flaws
- Foundations, which are covered by homeowners insurance and not a residential service contract
- HVAC systems undersized for your home
- Intentional damage or misuse
- Items that do not experience mechanical failure
- Items that fail because of a manufacturer defect
- Items that the contract does not state are covered
- Residential properties that have been converted into businesses ( here is an article about changing residential properties into businesses)
- Services that you have performed without prior approval
- Structural issues, which would also be covered by homeowners insurance and not a residential service contract
- Upgrades of existing items that are otherwise covered (in other words, you cannot upgrade from a 40-gallon water heater to a 50-gallon water heater using a residential service contract)
When you take out a mortgage, you will usually be required to take out homeowners insurance as well. That will cover you for foundational and structural problems in your home. Take a look at this article about homeowners insurance to learn more.
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Questions to Ask When Buying a Residential Service Contract
Whether you are buying a residential service contract for your home or you are looking into buying a property in a real estate transaction that involves a residential service contract, there are certain things you should watch out for:
- Make sure that you get the right type of plan that will really cover anything you would not be able to afford to fix on your own.
- Carefully check all call-out fees and deductibles to make sure you can afford them. Keep in mind that this is a balance: These fees are often much cheaper than being forced to pay for repairs to appliances and systems out of pocket.
- Ask about any coverage limits on your plan. Most residential service contracts pay only up to a set amount in a given year. If you experience a catastrophic problem that knocks out various appliances in your home at one time, you could run out of coverage.
- If you are buying a home with a residential service contract, double-check that home's warranty. Most people are not unethical, but it is relatively easy for an inexperienced homeowner to give you information that misrepresents the contract policy. So, always ask to see the paperwork. An honest seller will not mind showing you exactly the contract you are buying.
Whether you are buying or selling a home, you should always work with an experienced contract lawyer who can help you make sure that your residential service contract covers exactly what you need it to cover.
Meet some of our Residential Service Contract Lawyers
I am a NY licensed attorney experienced in business contracts, agreements, waivers and more, corporate law, and trademark registration. My office is a sole member Law firm therefore, I Take pride in giving every client my direct attention and focus. I focus on getting the job done fast while maintaining high standards.
A twenty-five year attorney and certified mediator native to the Birmingham, Alabama area.
Longtime corporate real estate counsel with specialities in commercial leasing, contracts, corporate governance, and general small business/startup/entrepreneurship legal issues.
I absolutely love helping my clients buy their first home, sell their starters, upgrade to their next big adventure, or transition to their next phase of life. The confidence my clients have going into a transaction and through the whole process is one of the most rewarding aspects of practicing this type of law. My very first class in law school was property law, and let me tell you, this was like nothing I’d ever experienced. I remember vividly cracking open that big red book and staring at the pages not having the faintest idea what I was actually reading. Despite those initial scary moments, I grew to love property law. My obsession with real estate law was solidified when I was working in Virginia at a law firm outside DC. I ran the settlement (escrow) department and learned the ins and outs of transactions and the unique needs of the parties. My husband and I bought our first home in Virginia in 2012 and despite being an attorney, there was so much we didn’t know, especially when it came to our HOA and our mortgage. Our real estate agent was a wonderful resource for finding our home and negotiating some of the key terms, but there was something missing in the process. I’ve spent the last 10 years helping those who were in the same situation we were in better understand the process.
Samantha has focused her career on developing and implementing customized compliance programs for SEC, CFTC, and FINRA regulated organizations. She has worked with over 100 investment advisers, alternative asset managers (private equity funds, hedge funds, real estate funds, venture capital funds, etc.), and broker-dealers, with assets under management ranging from several hundred million to several billion dollars. Samantha has held roles such as Chief Compliance Officer and Interim Chief Compliance Officer for SEC-registered investment advisory firms, “Of Counsel” for law firms, and has worked for various securities compliance consulting firms. Samantha founded Coast to Coast Compliance to make a meaningful impact on clients’ businesses overall, by enhancing or otherwise creating an exceptional and customized compliance program and cultivating a strong culture of compliance. Coast to Coast Compliance provides proactive, comprehensive, and independent compliance solutions, focusing primarily on project-based deliverables and various ongoing compliance pain points for investment advisers, broker-dealers, and other financial services firms.
Experienced General Counsel/Chief Legal Officer
Attorney Gaudet has worked in the healthcare and property management business sectors for many years. As an attorney, contract drafting, review, and negotiation has always been an area of great focus and interest. Attorney Gaudet currently works in Massachusetts real estate law, business and corporate law, and bankruptcy law.