MAO

Most new real estate investors learn the acronym “MAO” or Maximum Allowable Offer as their guide for how much to offer to a Seller for the purchase of their property. The formula for MAO works something like this:

(After Repair Value minus the Cost of Repairs) times 65% = MAO
Or:
(ARV – Repairs) X 0.65 = MAO

An example might be that if the ARV of a property is expected to be $250,000, and repairs are expected to cost $30,000, then MAO would be $143,000.

($250K - $30K) X 0.65 = $143K

Hence, $143,000 would be the maximum that the investor or buyer should offer in order to make a profit that justifies their time and effort. Exactly how much profit would that be?

Assuming that the costs to buy are roughly 1.5% of the purchase price, and the cost to sell roughly 10% of the sales price, then using our example above, the investor would net $49,855 (ignoring holding costs for now).

$250,000 - $30K (repairs) – (.10*250K) – (.015*143K) – purchase price =
$220,000 - $25,000 -$2145 - $143,000 = $49,855.

Transaction costs may vary, depending on real estate commissions and rebates, but these percentages are a pretty reliable guide when using outside sales agents. The MAO formula is used primarily by investors looking to “fix and flip,” or to re-sell a property quickly to generate cash.

Some investors may be happy with a smaller or larger percentage of profit, based primarily on perceived risk in the transaction. Gurus like to use a 35% profit margin (65% as the multiplier of ARV – cost) because it gives most new investors some room for error.

More experienced investors may run through the MAO formula, but are willing to settle for a $20,000 profit, or some smaller profit margin, again depending on the level of risk involved in the rehab and their comfort level or experience with the project.

Wholesalers who are trying to get a property under contract to sell to a more experienced rehabber should know MAO well enough to leave room in the deal for their assignment fee. It is good for the wholesaler to understand what profit margin is required by their buyer to make the transaction work for them.

If there is some doubt about what the property could sell for after being fixed up, then a lower percentage should be applied to the MAO formula. Some wholesalers, knowing that an investor will purchase at 65% of ARV – costs, will try to get a property under contract at 50-55%, in order to leave plenty of room for their assignment fee.

MAO is not as important to an investor who is buying a rental property to hold long-term for cash flow. In this case, it is the actual cash flow that matters when making an offer on a property.

And how do you know you have a good deal to offer to investors? Put it up on the your local real estate investor association website or on Craigslist, and see if you get any calls!

Happy Investing!

Wholesale to Cash Buyers

A “wholesaler” is someone who buys property at a low price and sells it at a low price. Both prices are below typical “retail” prices for a finished product. The wholesaler makes money by finding a property and negotiating a very good price for it. He/she gets paid for assigning the deal to a cash buyer who is able to make the improvements and market the property at a profit on the conventional real estate market.

Typically, a conventional mortgage lender will not finance a purchase transaction where the borrower’s name is not listed on the Purchase and Sale Agreement. Most lenders do not consider the Assignment Contract listing an end buyer as being sufficient to lend on the purchase.

That is why most wholesalers look for cash buyers. They also typically get their assignment fee paid in cash up front.

How does the new real estate investor go about building a cash buyers list?

One of the easiest ways is to network at your local real estate investor association to find out who is buying houses to fix and re-sell. Find out where they are looking to buy properties, and what are their criteria? What price range? What condition? What location? What features? How many bedrooms, baths, square footage? Do they want a garage? Any negatives, such as not being close to power lines or not being on an arterial?

Find out how quickly they could have cash available for purchase if you find what they are looking for. Then target your search for properties that meet your buyer’s criteria. In effect, your property will be sold, as soon as you find it.

Another tactic for the assertive wholesaler is to chat up folks at your local county foreclosure auction, as these buyers must have cash to purchase. Bring a list of whatever properties you may have gotten under contract at that point, or ask them the same questions (above) to find out what they buy. Collect business cards, or give them yours.

Happy Investing!

Building a Cash Buyer List

A professional wholesaler does NOT depend on "finding" a buyer to make a profit on a particular property. Instead, he works hard to identify potential buyers before he's ever found a property to sell to them. By networking with investors and rehabbers, he learns who's a cash buyer, what areas and types of properties they're looking for, what their exit strategies might be, what their requirements and pet peeves are, and how fast they can close. He gathers this information and keeps it where he can get to it when he needs it - that is, when he has a deal to sell them. By having a list of potential buyers, and knowing it well, you'll know to whom the property will probably sell before you even get it under contract. At that point, it's simply a matter of calling the right people until you get the answer you want.

Occasionally, matters conspire to put you in a position of having a great deal - but no buyer - despite your best efforts. This is where your real estate education comes into play. If you have the knowledge and resources to get these properties purchased and/or for getting your closing date delayed, you can still make these deals fly.

Tools you might use include a partner or private lender who can come up with the cash to close very quickly. Once you own the property, your exit strategies are no longer limited to a quick flip; you could retail the property or offer it for sale with owner financing. Another strategy might be to negotiate short-term seller financing or a "split funds" deal where you pay part of the purchase price now and part in 90 days. In wholesaling, as in the rest of the real estate business, knowledge is the key to profits.

Happy Investing!


Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto www.regoddess.com. One per household, please.

Wholesaler's Buyers List

Real estate investor Patrick Riddle offers a free Investor Phone Script, developed and used by Eric Medemar, that outlines how wholesalers should talk to prospective investors and cash buyers. This is a great method for developing a Buyer's List, if you are planning to wholesale properties to other investors.

Basically, the script goes something like this:

• "Hi, this is Wendy Ceccherelli, from Home Land Seattle.com." (It helps to have a website with a URL that relates somehow to the type of investing you will be doing. It is inexpensive to set up, and creates instant credibility that makes you look like a big time investor).
• "I'm an investor here in Seattle (name of your city) and I was researching a house to buy on (name of street). I noticed that you had purchased a property at (address on same street)."
• "Do you still own that property?" Depending on answer, follow up with questions about their particular niche for investing.
• "What do you think of the area (where their house is located)?"
• "Hey, thank you for your time and insight (on area). It's been really helpfuI and I really appreciate it."
• "Now before I go, I do occasionally come across some bargain properties that I can't close because I am tied up on other properties. I'd be happy to return the favor and give you the inside track when I come across these. Would you mind if I gave you a shout whenever I have some properties that you might like?"
• "OK, is this the best number to reach you? or should I shoot you an email?"

That's it! For access to this FREE investor script, or others like it, please contact me at HomeLandInvestment@gmail.com or 425-270-7292.

Happy Investing!