The MAO:What's the real numbers?

[Mo Sylla]

In his book " How to Be a Quick Turn Real Estate Entrepreneur in Any Economy" Real Estate guru Ron Legrand claims that your MAO(Most Allowable Offer)shouldn't go above 70% of the ARV(After Repair Value)of a property. Another famous Real Estate Investor,Armando Montelongo in his "Flip and Grow Rich" book also teaches the same precept. At the exception that he goes even further below,asking the new investor to bargain for as low as possible(he shoots for 65%.)

I have since included those stratagems in my overall strategy of putting properties under contract. I start at 65% then work my way up to the 70% bench-march. The fact that most sellers balk at selling their properties at 65 cents or 70 cents on the dollar pushed me to question the logic beyond these bench-marks.

The answer came in the form of a phone call from a Vice President of a Bank specialized in commercial lending. 

He posted his home for sale as a fsbo on Craiglist. The home looked nice,based on the pictures and didn't need any major repairs i concluded. Again,i picked my calculator,came up with a MAO,the Montelongo or Legrand's style and sent him an email with my phone number. He called me back.

He asked to know how i came up with my offer price? As i explained vaguely how,that's when he proceeded to tell me some of the  the reasons buyers require those thresholds.Simply put,the buyer's hands are tied up from the get-go. 

He continued to explain that these buyers go to hard money lenders and ask for loans. Their hard money lenders charge them "points"(a point is 1% of the amount of a loan.)In addition to all other closing costs,plus the down payment. Needless to say that the buyer leaves all his  or her feathers with the hard money lenders. 

The way for those buyers to recoup their investments is to ask for deeply discounted deals with the proverbial "motivated" sellers,which,as you know,can't be found on every street corner.

This is my version of what could be interpreted as either a myth or a reality,depending on whether applying the MAO rules has brought you success or the lack of it.

What do you know about the 70% rule?

How has it worked for you?

Where it was not applicable,what did you do to still get a deal?