Wholesaling 101 Question regarding offer price

[GaNeane Lewis]

We are brand new to wholesaling and have been spending the past month immersing ourselves in webinars, podcasts, training, etc. We have all of the formulas down for building a deal, determining ARV, rehab budgets, etc. We've even invested in deal analysis software. The ONE THING that is eluding us is that EVERY formula (be it software or not) starts with one thing: the price that you will acquire the property (which is obviously NOT what it is listed for). I've been searching all over but I cannot find a formula that will help determine THIS particular number (that everything else is dependent upon). What I have been doing in my mock deals is looking at comps and using an average number based upon square footage in the comps. But I don't know if this correct or not! Does anyone have a formula for determining what your purchase price should ideally be compared to list price? Or am I missing something obvious?

[Mitch Messer]

Hi @GaNeane Lewis and welcome to BiggerPockets!

Yes, that missing factor you are referring to is known as the Maximum Allowable Offer, or MAO (pronounced "mayo"). You can (and should) search here on BP for posts and podcasts on how to approach the MAO calculation. Below are the basics.

First, there will be a different MAO depending on how money is to be made from the investment. For fix-and-flip deals, MAO is calculated based on the ARV and the repairs needed. For buy-and-holds, MAO is determined by repairs and Net Operating Income (NOI), which is rental revenue less operating expenses.

For example, for fix-and-flips the standard MAO formula is MAO = (70% * ARV) less Repairs less Wholesale Fee. So, if ARV is $100K and total rehab expenses are estimated to be $20K, a wholesaler would need to get the property under contract below $50K (.70*100K - 20K) in order to earn a wholesale fee at all. How much below $50K will dictate the size of the wholesale fee earned.

That's just a start (my two good typing fingers are now worn out!), but I hope that helps!