Buying A House Is An Irreversible Decision: Or Is It?

A key decision-making framework to dissect your first real estate purchase

In today’s newsletter, I will break down a decision-making framework called Finding The Lead Domino and apply it to real estate investing.

(Today’s issue takes ~3 minutes to read)

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There are certain decisions you make that have an outsized impact on the course of your life:

• Picking your career path for your “day job.”

• Choosing a life partner

• Moving to a new city

• Deciding to invest in real estate

Shane Parrish at Farnam Street categorizes this type of decision as consequential and irreversible, as shown in the decision matrix below.

Making these decisions can be paralyzing…but there is a strategy that can help, known as Finding The Lead Domino.

Behind every consequential & irreversible decision (herein referred to as Lead Domino), a series of subsequent actions follow, which can greatly influence your future.

Once you make this decision, you are committed to the outcome.

Therefore, the first skill of decision-making is identifying your Lead Domino.

In Real Estate, the Lead Domino is the purchase of property (largely irreversible).

Unfortunately, people think that buying homes is a binary process. You either buy it or you don’t.

There is an important distinction here that is often overlooked…

While the actual outcome of a purchase is binary, the decision-making process is anything but.

There is a thorough process you can follow to build confidence in your purchase decision.

Breaking Down A Purchase Into Manageable Chunks

There are 3 distinct phases of a real estate transaction before you reach the closing table.

• Getting an accepted offer.

• Underwriting & appraisal contingency.

• Inspection & due diligence.

Each of these steps requires a high degree of scrutiny from multiple parties. More importantly, they also provide you opportunities to back out if certain conditions aren’t met.

Stage #1: Offer stage

The first rule of real estate investing is NEVER to send an offer that will guarantee you a negative cash flow.

If your budget is missing any of the following, you may be setting yourself up for failure:

• Repairs

• CapEx

• Property Management (I’d suggest budgeting for this even if you decide to self-manage. Things change)

• Vacancy (do NOT skip this one)

• Taxes & Insurance

• Utilities

• Misc (HOA, landscaping, etc)

So assuming you have negotiated an accepted offer with the seller that fits your investing criteria and has positive cash flow, you move to…

Stage #2: Underwriting & appraisal contingency

Your lender will provide another fail-safe during the underwriting stage of your loan.

Even if you were pre-approved, they will review your full financial situation and ensure you can truly afford the purchase before closing the deal.

Second, if the appraisal comes in below the accepted offer price, you will have two options:

• Back out of the deal.

• Pay for the difference between the approved loan amount & appraisal amount out of pocket.

Even if you pass through this page with flying colors, you next encounter the most consequential stage…

Stage #3: Inspection & due diligence

Real estate comprises “real” physical structures with a myriad of potential issues.

A standard offer has an inspection contingency, which allows the buyer to conduct a full property inspection. Upon receiving the results, you have several options.

• Back out of the deal.

• Request specific repairs before closing.

• Renegotiate the purchase price or ask for a seller credit at closing.

By the end of the inspection & due diligence phase, you will have either ironed out your major concerns or accepted them as part of the deal.

Congratulations! You’re Ready

If you’ve followed this process thoroughly, you will have

• Negotiated an offer with a positive cash flow

• Satisfied your lender’s funding requirements & appraisal

• Completed due diligence and addressed major repair concerns

You are now entering your consequential and irreversible decision from a position of strength. Time to tip over that Lead Domino and take the first step!