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!