For some time there has been a nifty little side business in real estate: Your friendly broker offers a homeowner warranty program to reduce buyer worries about possible repairs.
Such warranties may or may not be a good idea — you have to look at what’s included, what’s excluded, the up-front cost, the cost per incident, the deductible, the term of the coverage, etc. They are, after all, “limited” warranties. Also you have to ask whether the home is new or existing — new homes often have extensive warranties under state rules as well as warranties for specific items and systems such as the dishwasher and heating system.
You also need to ask if the broker suggesting protection is being compensated by a home warranty company (HWC) for such salesmanship, compensation which may be perfectly okay.
First, says FHA Commissioner David H. Stevens, “a payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback.”
Ah, but what about marketing home warranties in general?
Second, “depending upon the facts of a particular case,” says Stevens, “an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge.”
Third, the amount of compensation from the HWC for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.
The Bottom Line
So yup, compensation for the marketing of home warranties is allowed but kickbacks for “naked referrals” (just providing a name) to a home warranty company are not.
In addition to the three points made by HUD there ought to be a fourth; that is, buyers should be told up-front if the broker or salesperson is receiving a fee of any sort for marketing the warranty.
In practice, especially when local markets are slow, what often happens is that the broker or salesperson provides a home warranty with no charge as an inducement for a purchaser to buy. The cost of the warranty is a selling expense to the broker, just like the cost of advertising. The offer of a free warranty is also one reason why a seller might prefer to list with Broker Smith rather than Broker Jones who does not offer such an inducement.