Inside the Houston cash-for-homes market

Houston is ranked second by Norada Real Estate Investments for the 21 best places to invest in real estate in 2023. The Greater Houston area is expected to continue being a hot investor marketplace this year as its 7.2 million population grows more rapidly than most U.S. metros.

“We get a massive amount of investors coming to us looking for us to help them with investment properties, and a lot of them are cash,” says James Krueger, a top-performing real estate agent who sells properties 42% faster than the average Houston agent.

With interest rates dancing between 6% and 7%, the slowdown in home sales that is likely to persist through early 2023 makes cash offers even more appealing to sellers with a short timeline or houses that need updating. “Local home buyers can be a good solution for a seller,” says Ben Naumann, managing member of Christian Home Buyers, a home-buying company serving the Greater Houston area.

However, first-time or fair-weather investors facing high interest rates and inflation have created some challenges in the Texas market.

Seasoned Houston real estate investor Vaughn Ramcharitar, co-owner of Greater Houston Houses, says experienced real estate investors understand the cyclic market and purchase properties even during tough times. But newcomers who invested in Houston’s sizzling real estate market are backing off during the downturn. “When there’s a bump in the road they move on to something else,” he explains.

In the last six months, Ramcharitar has seen a surge of wholesalers and inexperienced investors trying to unload properties. In the past two years, they could easily sell homes above market price, particularly to out-of-state buyers. But that’s no longer the case. “Houses are sitting for months even if they’re priced reasonably. There are just not enough buyers who have a good credit rating and can get bank underwriting,” he says.

Investors either keep properties they purchase as long-term rentals or flip them on the open market. “The newbie with little experience doesn’t have the money to keep it long term. It takes a lot of money to fix the house and keep it with holding and carrying costs,” Ramcharitar points out.

For local investors in the Houston area, the cash-for-homes market is heating up. Ramcharitar typically purchases four to six houses per month. But he expects this number to double over the next few months due to increasing call volume.

Let’s examine the factors affecting Houston’s cash buyer landscape.

Rental demand ignites investor activity

Known as the Energy Capital of the World, Houston attracts job seekers in many sectors, including energy, medicine, space, and manufacturing. With employment at a record high in Metro Houston, the area entices investors looking for opportunities to meet the growing demand for rental housing.

Many aspiring Houston homeowners are delaying their plans to buy a house. Soaring interest rates, record prices, and short inventory supply leave renting as the most viable option, thus making Houston desirable for buy-and-hold investors looking for a steady income stream. According to Houston Association of Realtors (HAR) data for December 2022, single-family home rentals soared 24.3% year-over-year with the average lease price up 5.5% to $2,154.

“Local investors are concentrating on the rental market,” says Ramcharitar. Investors are buying homes to keep as long-term rentals that they can sell when the time is right rather than try to flip them in the current market with few buyers.

In the past, Ramcharitar flipped half the homes he purchased and kept the other half as rentals. But now he holds on to about 90% of his investment properties. He buys homes for cash, fixes them up, obtains refinancing, and then rents them out. Houston’s rental market is so active that he doesn’t even advertise for tenants. They sign the lease just a couple of weeks after the home is renovated and ready for occupancy.

Foundation and stucco issues afflict Houston homes

With its humid subtropical climate and clay soil, Houston homes are prone to foundation issues as well as the growth of mold and mildew. Flash flooding occurs in the Bayou City since the clay soil doesn’t absorb water and contributes to foundation problems. Ramcharitar says large oak trees with pervasive, spreading roots also crack foundations. If fault lines run through your Houston neighborhood, Krueger says you’re more likely to have foundation damage.

Foundations can be expensive and difficult to repair with costs in Houston ranging from $3,000 to $7,000. Signs of possible foundation issues include cracks in drywall, brick, and concrete as well as uneven floors, doors or windows separating from their frames, and buildup of mold and mildew.

Aging homes with a stucco exterior may have problems due to the abundant moisture in Houston. “Stucco doesn’t do well, but everyone wants stucco because it looks pretty,” says Krueger. According to HomeAdvisor, stucco repair costs from $600 to $2,475 depending on the severity of the damage. But if extreme weather ravages your Houston home, you might have to pay between $2,164 and $8,528 to replace stucco on a 1,500-square-foot house. And if you have a larger home with complex stucco issues, Krueger says you could end up paying a whopping $20,000 to $50,000.

Rather than making pricey repairs to resolve foundation or stucco issues that could chase away potential buyers, selling as-is to an investor might be an option worth considering.

Older homes need expensive upgrades

With more than three-fourths of Houston homes built before the year 2000, it’s not surprising that sellers turn to cash buyers when older homes require a substantial investment, such as a new roof or central air conditioning unit.

About 40% of sellers reach out to Ramcharitar because their aging homes need costly repairs. “They don’t have the funds to fix the home and sell it on the open market,” he says.

Ramcharitar says air conditioners work continuously for about nine months of the year because of Houston’s hot, humid climate, so their lifespan might be only five or six years. A new central A/C unit could set you back $1,700 to $3,000 plus another $1,800 to $2,800 for installation.

In older subdivisions, mature oak trees damage roofs as overhanging branches allow squirrels and other critters access to the roof and attic. Expect to pay $6,000 to $8,500 if your Houston home needs a new roof.

While problems with the roof or air conditioner may overwhelm sellers and turn off buyers, Ramcharitar doesn’t walk away from a property with issues. He routinely works with multiple crews of contractors so he completes renovations at a lower cost and with fewer headaches than most homeowners.

Naumann says buyers may not get a mortgage if big-ticket items like the roof or A/C aren’t in good condition. Houston sellers can bypass expensive fixes by selling to cash home buyers who will handle needed repairs.

Natural disasters and extreme weather leave fixer-uppers in their wake

Houstonians have seen more than their fair share of natural disasters like hurricanes, tornadoes, extreme rainfall, flooding, and even winter storms. These severe weather conditions damage Houston homes and require costly repairs if not covered by homeowner’s insurance.

Copper pipes may burst when the temperature plummets and power outages occur. Ramcharitar says homeowners have to repair the damage or replace copper pipes with more durable PEX. Other signs indicating your home needs new pipes include rust-colored or unusual-tasting water, low water pressure, clogged drains, and faucet leaks.

One local repiping company estimates the cost of pipe replacement at $2,000 to more than $16,000 depending on the type of material, home size, and the number of bathrooms and plumbing fixtures. PEX involves less demolition, so it’s cheaper than other products.

Houston’s heat and humidity are conducive to termite infestation. “If untreated for many years, they destroy the wood and damage the integrity of the structure,” says Ramcharitar.

But termites aren’t the only pests plaguing Houston houses. According to a study by Porch Group, a home services software company, the city leads the nation in pest infestation with nearly 15% of homes having rats, mice, cockroaches, or mold.

With Mother Nature wreaking havoc on Houston homes, sellers may turn to a cash buyer rather than take on the expense and hassle of getting rid of pests and making repairs.

Investors offer alternatives to foreclosure and bankruptcy

About 60% of sellers who contact Ramcharitar are behind on their mortgage payments. They may not be able to afford their home if a divorce or illness leaves only one person to pay the bills for a house purchased with two incomes. If you’ve received a foreclosure notice, you probably don’t have three or four months to wait for your home to sell on the open market.

“Foreclosure is like a bullet to the head,” says Ramcharitar. While some homeowners opt for foreclosure in a distressed situation, others decide to declare bankruptcy. “Having bankruptcy on your record is like dropping an atomic bomb on you and your family,” he comments.

Rather than succumb to foreclosure or bankruptcy, selling to a cash buyer in Houston could keep you from harming your credit when facing a financial setback.