How to make (and live with) big financial decisions

 As I shared with you a little over a week ago, we put in an offer on a foreclosure property.  That ended up being a multiple-offer situation and the bank sent all original offers back and requested a "best and final offer" (BAFO) submission from us.  I crunched the numbers and we came up with a higher offer (we originally submitted one at just over 1% of the bank's list price) that we could both get behind.  The offer was 6.5% higher than the list price, but it would  leave us with some equity above the initial investment (purchase price and estimated repair costs) and be a better purchase than almost anything else on the market.  

My husband and I both went to bed that night knowing that if our offer was accepted, we'd be happy with our bid AND if we lost the house to a higher offer, we'd be satisfied with our decision not to go higher.  As we went through this process of figuring out our BAFO, I noted a few concepts that I thought would be helpful to share with you regarding our decision-making process, especially since the offer we submitted would put us above our ideal cost-to-market value ratio.  

Image courtesy of: thinkunlimited

Image courtesy of: thinkunlimited

1. Decide which outcomes you can - and can't - live with.

You need to clearly lay out what outcomes won't keep you up at night. With our rental investment, we know what our target rate of return is. When our latest opportunity came up and we entered a multiple offer situation, our target rate of return was likely out the window. The property had some other positive attributes that don't directly factor into a financial rate of return, so we set a bar for our lowest rate of return we would be comfortable with and made our best and final offer to the bank selling the property based on that.

2. Take the emotion out of it.

Many people find that making a large purchase, like a car or home, can be emotional (even stressful). I think this is due to two things. The first is that you are tying up a substantial amount of money in one purchase and that means you can't use that money for something else if you need it. The second is that making a large purchase often involves a lot of unknown factors. For a house, you don't know if the market is going to appreciate over time and thus bring up the value of your property as you would hope. You can do several things to try to improve your odds of achieving this such as buying in a stable area with strong rates of owner-occupied properties and seeking out neighborhoods with good schools.  

When it comes to investment properties, don't get emotionally attached!  I don't look at mutual funds that don't meet my minimum investment criteria, and I bet you don't either.  The same goes for property - if it doesn't make business sense, don't even consider purchasing it.  This is a bit harder to do when you already own something but an investment property is not a family member or a pet - if it is showing a longer trend of underperformance, you need to get rid of it.

3. Set a deadline for making a decision, any decision.

As with any goal, making your decision time bound will aid in doing something. To avoid making a bad decision because your deadline is looming, build in some options for what making a decision looks like.

For example, with our rental property purchase we decided that we would start looking seriously at properties by December (after keeping an eye on the market for several months) and aim to buy a property by March. However, if we didn't find something that met our purchasing criteria, we would instead invest the cash we had saved up into REIT funds (real estate investment trust) that would put us in the real estate market. By March, we knew we would either have another property or our saved funds in an REIT.

 

I hope these three concepts are helpful to you.  I would love to hear how you make big decisions and sleep well at night after making them.  And I'll let you know in my next post the outcome of our BAFO for the rental property.