Traditional MAO Formula is Wrong

Are you struggling to buy properties because you are not finding good deals, but other investors are buying them?

This one mindset shift could easily make you $50K on your next flip, but if you are making this mistake you will continue to be outbid by other investors just waiting on your next deal to fall in your lap. 

My wife gets so mad at me because I'm always being the devils advocate in every scenario. I'm always wondering what the other side is thinking, and why they are making that decision. I will help you see what other investors are seeing. I'm not telling you if it's right or wrong, but I am saying it is what it is. 

What is the Standard MAO Formula? 

MAO, also known as Maximum Allowable Offer, is a formula for negotiating and wholesaling. The formula is as follows: 

MAO = ARV * 70% - Estimated Repairs. 

I first heard of this at a Fortune Builders Event in 2012 ( Keep in mind I didn't start investing until 2018). When I heard the formula I was amazed ARV * 70% minus expenses equals the purchase price. This formula was simple and easy to explain because my mind really sees equations clearly. It wasn't until the last three months when I was on a mastermind class with other investors throughout the country that I realized each of them had a different process to calculate the MAO formula. It was at this point I realized the MAO formula is broken. When I say this, I don't mean the formula is broken, but what I actually mean is investors are using the wrong numbers in he equation. 

Discovery of new information 

Who would have thought we'd see appreciation skyrocket within the last two years? I've continually seen investors overly conservatively lower their ARV simply because they do not rust the numbers or they believe their source is wrong and need to back off by 10%. If you are currently doing this, you are being overly conservative and it is costing you serious deals.  

I discovered the 70% was the wild card in the Standard Formula, and the reason the number was different across many investors. The reason it was different was because different investors wants different levels of return and not % of a return. For example if you have a 100K house X 70% - 50K = 20K. This will profit the investor 30K. However, if you use the formula how other investors around the country input the numbers it may look like this a 500K house X 70% - 50K =300K. This will profit the investor $150k, but in many markets investors don't need to make $150K per deal so they will buy this at 90% instead of 70%. 

In order to make a smart deal you need to determine the dollar amount you want to make in a flip, and then use that in your MAO formula instead of the standard 70% or 90% depending on the price of the house. The higher end houses will make more of a profit if you are able to buy with the 70% model, but many investors are getting outbid on this model. 

I'm not saying 90% is the number to use on the formula, it completely depends on your mindset, your goals, your skills, your resources, but for you to simply use a calculation because it is what everyone else is doing, is wrong and it is costing you deals. 

If this mindset of investing resonates with you reach out to your preferred real estate investment agent and use them as an advisor.  If you don't know an agent who is an advisor, keep shopping, there are agents in every market who are advisors!