Residential Service Contracts: What Do You Need to Know? What is a residential service company contract?

A residential service contract, also called a home warranty contract, is an agreement that covers certain repairs and replacements on systems in a residential property, usually for one year. Depending on the service contract, it may cover the structural components, appliances, or the electrical, plumbing, heating, cooling or air conditioning systems in a home. A service contract is not insurance nor is it a replacement for insurance. A homeowner’s insurance policy covers things such as damage to the structure of the property or to a homeowner’s personal property. A service contract covers specific components of the home when they fail due to normal wear and tear.

What do you need to know about these contracts? All companies selling service contracts in Texas must be licensed by the Commission. A current list of all licensed residential service companies is on the TREC website. A real estate sales agent or broker should be familiar with how a service contract works and what it covers. Typically, a contract only covers items that are in good working order when the contract is purchased. Many covered items have limitations of coverage and the contract may not cover the entire cost of all necessary repairs. A sales agent or broker should never represent that the contract covers everything or that it is a substitute for negotiating necessary repairs with a seller. Making this type of representation violates the Texas Real Estate License Act.

Coverage and cost vary by company, so you should recommend that your client compare companies before making a decision on whether to purchase a contract. If a buyer does get a service contract, it is a good business practice to recommend that the buyer carefully review the contract before they need it so that they understand what is and is not covered by the contract.

Do I need to disclose that I’m getting paid by a residential service company? Yes. A real estate sales agent or broker must present TREC Form RSC-1, Disclosure of Relationship with Residential Company, to each party the agent or broker represents.