Texas is one of the biggest and most populated states in the country, and it’s home to many big cities and metropolitan areas that attract residents and investors from all over the world. Whether you’re looking for a primary residence or a new addition to your rental property portfolio, Texas is a great place to search.
That said, purchasing a new property anywhere is going to carry risk – and Texas is no exception. So, what steps can you take to reduce risk when buying a new construction home in this lovely Lone Star state?
Strategies for an Individual Property
First, you need to think about strategies that you can use to reduce risk associated with buying an individual property.
- Understand the numbers. Before you even begin searching for a property in Texas, you need to understand the numbers that are relevant to your purchase. If you’re searching for a primary residence, the standard financial advice is to spend no more than 30 percent of your gross income on housing. If you currently make $5,000 of gross income per month, you should spend no more than $1,500 per month on your housing – and that includes not only your principal and interest payments but also property taxes, insurance, and PMI. If you’re planning to acquire this property to rent it to tenants, you need to understand how much rent you can appropriately charge – and whether it’s going to be enough to make the property adequately profitable. Also, before starting your house-hunting journey, it’s crucial to understand the loan details associated with a construction loan if you’re considering building a custom home. Factor in the closing costs and make sure to review the purchase agreement carefully. Working with a reputable builder can ensure your floor plan meets your expectations and remains within budget.
- Get a real estate agent you trust. Next, get a real estate agent that you trust. Real estate agents working for qualified buyers have a fiduciary duty to protect their clients. They’re going to serve as your guide and advisor, providing you with strategic direction, industry insights, and the knowledge and expertise necessary to avoid common pitfalls. They can help you find the right property, ask the right questions, and ultimately land yourself in a better financial position.
A knowledgeable real estate agent can also help you understand the real estate agent’s commission structure and how it affects your overall budget. If you’re opting for a conventional loan, they can guide you through the specifics and help you weigh it against other financing options. For home buyers interested in an existing property, an experienced agent can identify potential issues and negotiate favorable terms on your behalf.
- Do your due diligence. Always do your due diligence. Just because a property looks good, rests in an ideal neighborhood, and is listed for a reasonable asking price doesn’t mean you should immediately make an offer and give a down payment. You need to understand relevant real estate market dynamics, including both overall dynamics and local dynamics. You need to understand the neighborhood, inside and out. You need to study and analyze comparable properties to better assess this property’s value and asking price. You need to understand the most probable problems and obstacles that could be associated with this property.
- Estimate conservatively. You can also reduce your risk exposure by estimating everything conservatively. If you think property taxes are going to be $3,000 a year, estimate them to be $3,500 a year. If you think the property is going to need $8,000 in repairs, estimate $10,000 in repairs just to be safe. This way, you’ll consistently beat expectations – and unexpected developments aren’t going to have the power to rattle you. In line with this, it’s a good idea to have emergency savings set aside so you can handle surprise issues without going into more debt.
When dealing with construction loans, saving money for potential cost overruns is essential for financial readiness. Discussing these contingencies with your loan officer can ensure you’re prepared for unexpected expenses while managing most conventional loans effectively.
- See the property in person. In today’s era of online listings and digital connectedness, it’s easier than ever to buy and even manage properties remotely – especially if you’re willing to work with local real estate agents and project managers. However, it’s still a good idea to see the property in person before you make an offer. Real estate photographers do an excellent job of portraying their properties in the best possible light, so even “real” photos can be deceiving.
- Add contingencies. Always add appropriate contingencies to your offers. In especially competitive environments, it’s increasingly common for people to waive contingencies and make “as is” offers for properties. However, this is inherently risky and only permissible if you can personally tolerate that risk. It’s much safer to put contingencies in place to protect you in case your financing falls through, in case an inspection fails, or in case you go through a major life change that warrants pulling out.
- Get a thorough home inspection. One of your most important contingencies is related to your home inspection, which should never be skipped. It’s your responsibility to hire a home inspector you can trust – and walk with them through the existing home as they flag any problematic issues. If you find anything troubling, you can renegotiate the purchase price or even pull out of the deal.
- Purchase insurance. If you’re getting a loan for this house, the bank will likely require you to have an insurance policy in place for the property. However, even if there isn’t a lender requirement forcing you to do it, you should get a robust insurance policy in place. Read the fine print carefully to make sure you understand exactly what’s covered and what isn’t.
Strategies to Reduce Overall Real Estate Investing Risk
If you’re looking for ways to reduce your overall real estate investing risk, these are some of your best strategies:
- Keep your DTI ratio in check. Your debt-to-income ratio (DTI) is a measure of how much debt you’ve taken on compared to your current stream of income. The higher it is, the more financial risk you bear. Always keep an eye on this figure and avoid expanding your portfolio until it reaches an acceptable threshold.
- Diversify. It’s possible to diversify a real estate portfolio in many different ways; you can purchase both residential and commercial properties, as well as properties in different geographic areas. You can also diversify your investments by pursuing different asset classes.
- Periodically reassess. Take the time to periodically reassess your holdings. Are any properties failing to generate meaningful revenue? Are some more trouble than they’re worth?
Want to feel safer and more confident buying your next Texas dream home? Our real estate agents and Houston property management services can help. At Green Residential, we’re bona fide real estate experts – and we’re here to help you make the best decisions for your financial future.
If you’re ready for your free consultation, contact us today!
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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